State and Local Government Pensions and Other Post-employment Benefits

On March 17, 2010, RIPEC will released a summary of the state’s Employee Retirement System, municipal pensions covered in the Municipal Employee Pension System and locally-administered plans, and retiree health care (OPEB). The report suggests strategies to curb future costs to taxpayers while providing appropriate benefits to the state’s and municipal workforces.

State and local governments are facing financial stresses. One of the primary budget drivers is personnel costs and one of the most significant drivers of these costs is employee benefits, such as health care and pensions. Rhode Island governments will face a significant growing cost of providing for both pensions and health care over the next years, at time when they are least able to respond due to the current economic climate.

In the Governor’s proposed FY 2011 budget, all funds personnel expenditures at the state level 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 has 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 between FY 2001 and FY 2011. One should note that the state’s share for the teacher retirement is not included in these expenditures.  

Retirement and health benefit costs also represent one of the fastest growing components of municipal expenditures (excluding education aid) and represented over one-quarter of all non-education-related municipal spending in FY 2010.  Combined, the full cost of the unfunded liability for both state and local government pensions and OPEB amounts to $9.4 billion. The state accounts for 36.4 percent of the total liability, whereas local government’s liability accounts for 63.6 percent.

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 and municipalities in order to keep pension contributions affordable. If the state and municipalities do not take further action to control the ever-growing cost of pension systems, there will be fewer resources available to support current programs and services offered by the state and cities and towns to its residents.

The state and municipalities have several different ways to improve their retirement system, including keeping up with funding requirements, changing the benefit structure, sharing risk with employees, increasing employee contributions, and reevaluating actuarial assumptions. In addition, municipalities should evaluate merging their self-administered plans into the MERS if savings can be achieved.  Furthermore, the State and local governments have a number of ways to address the OPEB liability, including reducing the liability by changing the benefit plan or employee contributions, eliminating or limiting coverage, or establishing a statewide trust for the purpose of holding, investing, and distributing assets to fund employee benefits.

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