GOVERNMENT AFFAIRS


Pension Reform Overview

The Rhode Island Retirement Security Act of 2011 (RIRSA), introduced last week by Gov. Lincoln Chafee and General Treasurer Gina Raimondo offers a blueprint for an affordable, sustainable and secure system for everyone - retirees, employees and taxpayers.

What follows is a summary of the bill, drawn from various sources, outlining the details of this historic legislation.

The reform bill is designed to provide a secure retirement for all 66,000 members of the state retirement system. The legislation is comprehensive—addressing regular and disability benefits, and many loopholes—and modernizes the state-administered pension system.

RIRSA ensures that the pension system is well-funded, and includes safeguards that will make the system affordable in the future. It shifts the current cost burdens, borne mostly by taxpayers and younger employees, to everyone and is designed to stabilize the state-administered pension system permanently.

Without immediate reforms, the impacts on the state’s finances will be dire:

  • The cost of the state pension system to the taxpayers will be over $600 million next year and more than $1 billion in just over 10 years.
  • There will be significant increases in both state taxes and local property taxes, coupled with painful budget cuts
  • The risk that the pension fund will run out of money before many current employees reach retirement will loom large
  • State and municipal bond ratings will be downgraded, raising the cost of borrowing for all – and putting more pressure on tax revenues

Should the General Assembly pass pension reform, however, Rhode Island will begin to realize the benefits almost immediately.

  • The unfunded liability of Rhode Island’s pension system will be reduced by more than $3 billion and increase the funding status to over 60 percent
  • The current levels of taxpayer contributions to the pension system for the next year (approximately $300 million) will be maintained
  • Taxpayers will save at least $3 billion over the next decade
  • Municipalities will save approximately $100 million in the next year alone, and at least $1 billion over the next decade

Here are the key components of the pension reform bill:

  • Creation of a defined benefit and defined contribution plan

A combined defined benefit and defined contribution plan will spread the risk in the system fairly to both taxpayers and employees. Employees and teachers would actually pay a smaller amount of their paychecks into the defined benefit system, and will also contribute into their own retirement accounts.

Under RIRSA, state employees and teachers will contribute 8.75 percent out of each pay check toward their retirement.  (Today, state employees contribute 8.75 percent and teachers contribute 9.5 percent, so this represents a decrease of 0.75 percent for teachers from what they currently contribute.)

They will also contribute five percent of pay into their own retirement account and the state will contribute an additional one percent to this account. This structure creates a portable benefit, which employees can take with them, regardless of where they work. Combining these two structures ensures that employees could receive more than 70 percent of their final average pay in retirement - a similar benefit level to what they receive in the current system.

  • Change in retirement age

For most employees, the new retirement age will match their Social Security age. However, provisions are included to accommodate those close to retirement, as well as those eligible to retire. For those already eligible to retire, their retirement age remains the same. For those 52 years old and vested who can now retire prior to age 62, the new retirement age is 62.

  • Cost-of-living adjustment

The COLA is one of the most expensive aspects of the current pension system (continuing to pay a COLA without enough investment earnings will eventually deplete the pension fund). Under the reform bill, the COLA would be put on hold until the system was healthy; i.e., at actuarially acceptable funding levels. Once the system reaches healthy funding levels, a reduced COLA, tied to investment performance, will automatically return.

  • Protecting Pension Benefits

RIRSA includes a new set of provisions that adds protections for employee pensions, similar to the federal Pension Protection Act.

  • Re-amortization

The current amortization schedule would be increased by six years, from 19 to 25 years, under the reform proposal. The state’s actuary has endorsed re-amortization, since it is part of a package of fundamental benefit reform and a significant reduction the state’s unfunded liability.

  • Independent Municipal Plans

The reform bill helps communities address their independent municipal plans which are outside of the state-administered pension system. RIRSA sets a path for cities and towns to tackle their struggling plans.

RISCPA members currently scheduled to testify: 

October 26th - Cap Willey, CPA and Patricia Thompson, CPA
October 27th - David Krekorian, CPA
November 1st - David Lucier, CPA, Don Wisehart, CPA and Greg Porcaro, CPA

We will keep you informed of progress on pension reform at the state House through periodic special editions of the “Society Update”.