Retirement Benefit Reform Needed to Maintain Local Fiscal Sustainability

Today, June 7, 2011 the Rhode Island Public Expenditure Council (RIPEC) released a report on municipal retirement benefit obligations. In addition to providing a summary of the status of pension and other post-employment benefits (OPEB) throughout the state, the report provides an overview of the proposed Municipal Accountability, Sustainability and Transparency (MAST) Fund and how the proposed requirements may affect municipal budgets.  See the full report here.

Long-term obligations such as unfunded retirement benefit liabilities pose significant risks to governments and, thus, taxpayers.  Based on the most recent actuarial information, the combined state and local pension and OPEB liability was $11.4 billion as of June 30, 2010.  This represents an increase of almost $2.0 billion from RIPEC’s 2010 report on state and local pension and OPEB liabilities.  Experience studies, which compare “actual to expected” performance were conducted for two of the state’s approximately 150 pension systems – the Employees’ Retirement System of Rhode Island (ERSRI) and the Municipal Employees’ Retirement System (MERS).  These studies increased the total unfunded liability for these plans by over $1.6 billion, bringing the total outstanding debt related to retirement benefits to over $13.0 billion, even without accounting for changes to locally-administered and OPEB plans.

Local pension and OPEB obligations account for 66.9 percent of the total $11.4 billion unfunded state and local retirement benefits liability.  The most recent actuarial valuations indicate that the cumulative funding ratio for municipal pension plans, excluding the local share of teacher retirement, was 50.3 percent, whereas the cumulative funding ratio for OPEB plans was just 0.8 percent.  Funding these liabilities represents a significant challenge for municipal governments: if all municipalities had fully funded their annual required contribution (ARC) in FY 2010, the fiscal commitment would have equaled 25.9 percent of the total statewide levy.

The proposed MAST program represents a step toward long-term municipal fiscal sustainability.  A number of the mandates, such as timely submission of financial statements, uniform reporting and a focus on out-year budgets allow for a more comprehensive understanding of the fiscal status of each municipality.  In addition, as RIPEC has noted, outstanding retirement benefit obligations are a risk to the long-term sustainability of local budgets and must be addressed.  To this end, the funding requirements under MAST represent sound fiscal policy.  

Not all cities and towns are subject to the same set of economic conditions or circumstances, however, which results in a differential ability to respond to these requirements.  Those communities that are most impacted by the MAST mandates are, for the most part, municipalities that have been designated as fiscally stressed and are thus the least able to respond.  While there are funds attached to the MAST program, they do not offset the increased cost to communities that are the most in need while significantly increasing their financial obligations.

The response from the state does not need to be solely in the form of monetary support to local governments.  Rather, the state should enable municipalities to make changes that would affect their fiscal future by allowing greater flexibility to address their primary cost drivers.  While the outstanding obligations are significant, changes to retiree benefits, such as the introduction of premium sharing for retiree healthcare, adjustments to COLAs or tighter control over disability benefits will reduce future obligations and costs.  Moreover, greater flexibility would allow communities to take a more proactive position regarding their overall fiscal health, thus achieving the ultimate goals of the MAST program.

RIPEC is an independent, nonprofit and nonpartisan public policy research and education organization dedicated to the advancement of effective, efficient and equitable government in Rhode Island.  For more information about RIPEC, please visit our web site at

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