On March 7, 2010, RIPEC released its analysis of the Rhode Island State Pension System. The report analyzes the current state of Rhode Island’s pension system and suggests strategies to curb future costs to taxpayers while providing appropriate benefits to the state’s workforce.
State and local governments are facing financial stresses. One of the largest budget drivers is personnel costs, which represents 22.0 percent of the state’s all funds expenditures in the proposed FY 2011 budget. Employee benefits, such as health care and pensions, are one of the most significant drivers of these costs.
In the Governor’s proposed FY 2011 budget, personnel expenditures amounted to approximately $1.7 billion, an increase of 43.2 percent since FY 2001. The fastest growing component of total personnel expenditures during this time has been retirement costs. Over the ten-year period, expenditures on retirement have increased 124.6 percent, from $60.7 million in FY 2001 to $136.3 million in FY 2011. In FY 2001, retirement costs accounted for 5.2 percent of personnel expenditures. This share increased to 8.1 percent in FY 2011. Medical costs have also increased at a significant rate since FY 2001, growing by 50.9 percent. Together, these two categories account for approximately one quarter of the growth in personnel costs between FY 2001 and FY 2011.
In the FY 2011 proposed budget, retirement costs for state employees and the state’s share for teacher pensions accounted for 4.7 percent of the state’s general revenue expenditures. This figure includes the savings through the pension changes proposed by the Governor. If the changes are made, in FY 2015, retirement costs would slightly increase to 4.8 percent of the state’s general revenue budget. If these pension changes are not made, retirement costs for state employees and the state’s share for teacher pensions would amount to 5.5 percent of the state’s general revenue expenditures in FY 2011, and 7.8 percent in FY 2015.
The state has several different ways to improve their retirement systems, including keeping up with funding requirements, changing the benefit structure, sharing risks with employees, increasing employee contributions, and reevaluating actuarial assumptions. Over the past few years, a number of changes have been made to reform the state’s pension systems; last year, the General Assembly enacted additional changes to the Employees’ Retirement System (ERS). However, these changes may not be enough to sustain the pension system.
Given the fiscal crisis facing state and local governments, coupled with dampened market performance, and demographic factors such as longer life expectancies, there is a need to reexamine and reform the pension systems across the state in order to keep pension contributions affordable. If the state does not take further action to control the ever-growing cost of the Rhode Island’s pension system, there will be fewer resources available to support current programs and services offered by the state to its residents; even with the current reform proposals, funding requirements will continue to take a larger portion of state revenues each year until the system is fully funded in 2029.
Policymakers must take into consideration the viability of the pension system in Rhode Island against the backdrop of the current economic conditions as the retirement system absorbs the market loses from 2008 and 2009, the state’s limited fiscal capacity, and the impact of increased retirements, which will be measured in the forth-coming experience study. Any additional pension cost increases over those currently projected will occur when the state is least able to respond. Currently, the FY 2012 budget is out of balance by an estimated $362.2 million, and future out-year deficits are even more significant. Rhode Island needs to take measures to reduce the annual cost, review the actuarial assumptions and consider eliminating the risk inherent in the current defined benefit plan as it works to keep the pension system sustainable.