The Honest Pension Plan for Rhode Island's Future
The Chafee pension plan will
The Chafee plan is the only plan that will accomplish these objectives. It recognizes that we, as a state, can do far more for our future by coming together to resolve issues than by engaging in partisan or political sniping and posturing.
This plan represents the first meaningful step in bringing all interests together to resolve this matter in a substantive way. It is a reflection of Senator Chafee's willingness to provide honest answers to real problems.
This proposal makes changes to municipal pension plans for plans administered by the state and plans administered by municipalities. Changes include a reduction in disability pensions for those not totally disabled and increased years of service and higher age requirements for retirement eligibility for both regular and public safety employees.
The proposal moderately changes benefits for active non-vested employees (10 years or less employment) and substantially changes the benefits for new employees. The only change for vested employees would be a change in the disability rules which has already been enacted for state employees and teachers.
The proposal also introduces a much lower benefit for all new employees (municipal, state, and teachers) and recommends a defined contribution plan for these new hires who are not social security participants.
Rhode Island must take action to protect both the taxpayers and state and municipal workers from the consequences of a multitude of bad choices that have been made over the years and continue to be made today.
While the focus of the General Assembly and one of my opponents has been on the status of the state employees and teacher’s pension plans, the real crisis is with our municipalities. According to a March 2010 report by the Auditor General, municipally administered pension plans are only 40% funded as compared with a better than 60% funded ratio for our state employees and teacher plans (and over 90% over all for our state administered municipal plans).
Some municipalities have addressed this problem with ever increasing pension plan contributions, but others have not. Even for the well funded municipal plans (both state administered and municipal), the annual costs have increased dramatically over the last several years.
Restructure the state pension plan.
The state pension plan must be restructured and properly financed. To do so, Senator Chafee proposes the following steps:
1. Reamortize the current pension obligation to reflect the effect of the recession and the continued unrealistic return assumptions that have been made by the state over the past eight years. This is not something to be done lightly, but given the poor returns of the pension fund over the past four years is an essential first step to financial stability.
2. Create a hybrid system for new teachers and state employees that combine a reduced defined benefit program with a 401(k) component similar to federal employee benefit plans. The plan will also be mandated for non-vested employees with less than five years of service, and optional for those with five to ten years of service.
3. Conduct a thorough audit of existing pensions that exceed normal parameters. To assure compliance with the new statewide benefit standards, the state retirement board would be granted oversight responsibility for municipally administered plans and would take direct responsibility for review and approval of disability applications.
4. Develop a long term plan to coordinate retirement age to social security eligibility, with actuarially fair early retirement reductions.
Reform municipal retirement plans
Failure of municipal pension systems should not be dismissed as a possibility. A systemic failure of the municipal pension systems could have a devastating effect on the state's budget and its credit rating. It is essential for the state to ensure coherent, fair pension systems by the municipalities in order to preserve the state's long term financial standing. It is critical that pension benefits be equalized between municipal employees, state employees, and teachers. Municipal employee pensions have seen the greatest cost increases in the recent past and will continue to increase dramatically in the future without intervention now.
Senator Chafee proposes the following steps:
Adjust age eligibility and years of service requirements for non-vested municipal employee retirement system (MERS) members to age 59 with 29 years of service. This makes the system identical to the state system as modified in 2005.
Adopt a hybrid defined benefit/contribution plan after one year of service for all new municipal employees and teachers identical to the plan to be adopted for state workers. The mechanics would be similar to the plan offered to federal employees. The plan will also be mandated for non-vested employees with less than five years of service, and optional for those with five to ten years of service.
Reduce partial disability pensions to 50%. The plan would eliminate the authority of city and town councils to negotiate and guarantee disability pension thresholds. The proposal would preserve the 66 2/3% accidental disability pension for employees who have been found by the retirement board to be “permanently and totally” disabled from any employment. For accidental disability applicants who are not found to be “permanently and totally” disabled from any employment, the accidental disability benefit is reduced to a maximum of 50%. New public safety employees would receive work injury coverage through worker’s compensation as is the case in every other state except Massachusetts.
Adjust age eligibility and years of service requirements for non vested regular municipal employee retirement system (MERS) members as of July 1, 2011 to age 59 and 29 years of service (from 30 years of service with no age qualifier). This change is consistent with the reforms enacted in 2005 for state employees and teachers. There is no proposed change to the current non compounded cost of living adjustment (COLA) available to MERS employees as compared with the current compounded COLA available to teachers and state employees. The proposal also provides for a new much lower benefit accrual schedule for all new employees (1.25% annual accrual instead of 2%). These same benefit limitations (for both non-vested and new employees) would also apply to all municipally administered plans.
Public safety employees will be treated somewhat differently than other employees in recognition of required earlier retirement ages. Age eligibility and years of service requirements for non vested police and fire members of the municipal employee retirement system (MERS) as of July 1, 2011 would change to age 55 and 25 years of service (from 20 years of service). The proposal also provides for a new much lower benefit accrual schedule for all new employees (1.75% annual accrual instead of 2% to 2.5%). These same benefit limitations (for both non-vested and new employees) would also apply to all municipally administered public safety plans. Once again, employees with five to ten years of service would be able to opt into the new hybrid plan. The state has already moved to modify benefits for state police, correctional officers and nurses at Eleanor Slater Hospital.
We must conduct a thorough audit of existing pensions that exceed normal parameters. To assure compliance with the new statewide benefit standards, the state retirement board would be granted oversight responsibility for municipally administered plans and would take direct responsibility for review and approval of disability applications.
This proposal will provide for the same significantly lower benefit schedule for new state employees and teachers (along with a lower employee contribution) and would also provide an additional defined contribution plan for those employees who are not social security beneficiaries.
It is impossible to determine how much this proposal would save our cities and towns, but it will be substantial. The data is not available to make a firm estimate because of information problems relating to our municipally administered plans. Additionally, some municipalities are not paying what they should be paying, resulting in an annual underfunding in the area of $30 million.
It has also been argued there is no need to adjust the MERS benefit plan since it is so close to being 100% funded. It has become very costly to fully fund this plan. All municipalities need to reduce their costs so they can provide public services and reduce the burden on our tax payers.
One candidate has presented a plan which would once again only address state employees and teachers. That plan assumes that future benefit accruals would be limited to 1% a year for all active employees. The best legal advice I have received is that such a plan affecting vested employees would not meet the legal test and would ultimately be reversed, increasing our costs once again.
We should draw our inspiration from Vermont, where a collaborative solution to the pension problem was thought impossible, but through hard work and careful listening a consensus solution was implemented.
No plan is perfect. The issue is complex, emotional, and personal for many people. This plan may not be the ultimate solution, but it is fair and honest.
Linc Chafee is a tested leader of unquestioned integrity and a strong independent voice. As Governor, he will work hard to create new jobs, rebuild our economy, solve our chronic budget problems, end corruption, and forge a new way forward for Rhode Island.