Lessons from Rhode Island: Bold Changes to Its Pension Plans Have Caught the Attention of Other States
Snell, Ron, State Legislatures
Tough times in Rhode Island may end up helping other states, at least when it comes to pensions.
Lawmakers in the Ocean State, confronted with one of the worst-funded pension plans in the nation, have gone further than any other state in making significant changes and applying them to almost all current state and local employees.
"It would certainly be a lot easier to walk away from this reform," Senate President Teresa Paiva Weed said after the vote. "However, it is clear that doing nothing only puts our retirees' and our active members' benefits at greater risk. We owe it to them, as well as to all other taxpayers, to attack this challenge head on."
It's a move other legislatures are watching as they grapple with their own pension problems.
Of the 41 states that have enacted major state pension reforms in 2010 and 2011, Rhode Island stands alone. No other state has set out to change its plan for state employees and teachers the way Rhode Island has. Legislation passed in November moved current members in the traditional defined benefit plan to what's called a "hybrid" model that supplements the traditional plan--at a reduced level of benefits and costs--with an individual account similar to the 401(k) plans common in the private sector.
Adopting the hybrid plan was significant but not unprecedented. Indiana has had a hybrid system for more than 60 years, and Michigan and Utah adopted such plans in 2010. The novelty of what Rhode Island lawmakers did lies in moving current members into the new plan.
There are constitutional and legal constraints on states' ability to change pension plan coverage for people who already are members. The constraints differ greatly from state to state, and few have been tested in courts. Legislatures and governors move cautiously toward these restraints, however, and, until Rhode Island took its action, have never applied major pension plan changes to current employees and retirees. Massachusetts, for example, enacted legislation in November that raises retirement ages and reduces eventual benefit packages. It will apply only to new members of the system.
Policymakers who have been bold in raising current employees' contribution requirements and changing post-retirement cost-of-living adjustments have encountered legal challenges as a result. States facing actual or threatened lawsuits include Arizona, Colorado, Florida, Minnesota, New Hampshire, New Jersey, New Mexico, South Dakota and Washington.
Rhode Island lawmakers did not lightly or without good reason move into new territory. The state is awash in troubles. Some of them, like high unemployment and decay of its former manufacturing base, are shared with many other states. Others, however, are more peculiar to the state. Rhode Island's small population--l.05 million in 2010--is barely growing and is a little older than the U.S. average. Its pension plan, for the size of the state, has been among the worst-funded. Although the legislature has made many changes to shore up its pension plans, a sea of red ink has flooded the balance sheet.
A summary of the enacted legislation states Rhode Island "is struggling to emerge
from its most recent economic downturn, dealing with high unemployment, sluggish real estate markets, and structural deficits in its five-year forecast. Recent economic forecasts suggest the state is not likely to grow its way out of the problem." Much the same could be said for other states. In California, for example, Governor Jerry Brown has proposed pension reforms with some of the same provisions enacted in Rhode Island, including a hybrid plan.
Rhode Island lawmakers, like those in other states, were concerned about the rapidly growing unfunded pension liability. Before the legislation passed, the forecast for growth from FY 2012 to FY 2013 was from $4.7 billion to $6. …