On Monday, February 16, 2009, RIPEC released its analysis of the Rhode Island State Pension System. The report analyzes the current state of Rhode Island’s pension system and compares it to other New England state systems and the nation.  The report finds that:

• The estimated funding ratio for the Employee’s Retirement System of Rhode Island (ERSRI) is 57.5 percent while the Rhode Island teacher pension has a funded ratio of 55.4 percent.  Studies of major pension plans in the U.S. indicate the aggregate funding ratio is 86.0 percent;
• Combined, Rhode Island’s state employee and teacher pensions have a net estimated unfunded liability of approximately $5.0 billion;
• Based on a recent comparison among New England states, Rhode Island’s State employee pension system (Schedule A) appears to be more generous due to the availability of early age retirement without penalty and the program’s 3.0 percent COLA  that is applied to years of service;
• Even with changes effective July 1, 2005, Schedule B participants still receive the 2nd highest pension for retirees in New England, assuming retirement at age 60 with 30 years of service, and a final average salary of $70,000;
• As of June 30, 2007, the average state employee pension was approximately $23,781, and the average teacher pension was approximately $41,340.  

To address the growing amount the state contributes to pensions, to mitigate the risks inherent in the current pension system and to meet the impact of the economic downturn, RIPEC recommends that state government seek alternative ways to reduce cost and minimize risk.  This is a necessary step to begin to control the rate of growth of pension cost and to reduce the unfunded liability.  Governor Carcieri has proposed several reforms to the current pension system for state and municipal employees and teachers.  These reforms propose to reduce both the unfunded liability and the growth in operating budget expenses related to pensions.

The Pension Review Committee formed by the House of Representatives has asked the actuary to review additional reforms, such as providing for COLAs to go into effect only when retirees reach the age of 65, establishing a minimum retirement age of 59 and considering a similar pension system as the Federal Employees Retirement System, which is a hybrid pension plan.  These and other reforms are intended to address how to reduce cost and the unfunded liability and ought to be seriously considered. Without the reforms, state and local governments will not be able to control one of the major budget drivers they face in the coming years.

RIPEC recommends that the State consider a defined contribution plan where the plan is structured around using the “normal cost” of pensions as the funding mechanism.  The unfunded portion of the Annual Required Contributions (ARC) would still be an issue, but this would be the case with or without a defined contribution plan.  A hybrid plan would also mitigate several of the risk issues inherent in a defined benefit plan.

RIPEC also suggests consideration of the impact these proposed reforms will have on employment within the state.  This will be the second round of pension reform over the last several years.  Coupled with the recent healthcare changes these adjustments to employee benefits have, and will continue to have, an effect on the composition of the state workforce. In addition, any changes to the pension system, while considering the affordability and sustainability of the state’s pension fund, should include an evaluation of the overall impact on the state’s pension contribution in out-years. Any reduction in workforce produces payroll savings to the state. However, when payroll significantly declines, as it has for state employees since June 30, 2007, the scheduled contribution rate does not produce the expected amortization payments and the resulting shortfall in payments must then be funded in the future.