Rhode Island Pension Reform Shows Boldness Pays

Across the nation, large and growing budget deficits have forced politicians from across the political spectrum, including some Democrats, to seek to bring public employee compensation under control. This has required them to take on government employee unions, which has created considerable friction between the unions and their traditional Democratic allies (a point I’ve noted elsewhere).

Many Democratic lawmakers’ reform proposals have not been as far-ranging as those put forth by their Republican counterparts, but deep-blue Rhode Island is a notable exception. In fact, the Ocean State’s  pension reforms are the boldest in the nation to date.

This weekend’s Wall Street Journal features an interview with Rhode Island State Treasurer Gina Raimondo, who designed the state’s pension overhaul. It is well worth reading. Rhode Island’s pension reforms confirms the characterization of pension reform by Utah State Senator Dan Liljenquist, who led his state’s successful pension reform effort: “This is not a conservative-versus-liberal issue, this is a reality issue.”

Indeed. Liljenquist is a Republican, and therefore unlikely to get union support. Raimondo is a Democrat, but her state’s pensions faced a financial situation so dire that tackling the problem became a priority, even if it risked a union backlash. As the Journal‘s Allysia Finley notes:

The new law shifts all workers from defined-benefit pensions into hybrid plans, which include a modest annuity and a defined-contribution component. It also increases the retirement age to 67 from 62 for all workers and suspends cost-of-living adjustments for retirees until the pension system, which is only about 50% funded, reaches a more healthy state.

Several states have increased the retirement age or created a new tier of benefits for future workers, but reforms that only affect not-yet-hired employees don’t save much money. A lot of “people say we’ve done pension reform when all they’ve done is tweaked something,” Ms. Raimondo points out. “This problem will not go away, and I don’t know what people are thinking. By the nature of the problem, it gets bigger and harder the longer you wait.”

[ … ]

In April, she convinced the state pension board to cut the discount rate by which the state calculates its pension liability to 7.5% from 8.25%. She claimed that 7.5% was a more honest number since the actual investment return rate over the last decade was 2.28%.

Of course, not all state pension reforms will be as comprehensive as Rhode Island’s, but for many states doing nothing is not an option. Today, a Journal editorial posits that New York Governor Mario Cuomo may have missed an opportunity in reforming his state’s public employee pensions.

The piecemeal reforms are a step in the right direction and would be more encouraging if the Governor hadn’t then declared pensions a closed issue. The legislation offers the relatively few non-unionized employees the option of 401(k)-style pensions, which they can take with them if they leave government service. It also raises the retirement age to 63 from 62 and trims today’s generous annuities—typically about $50,000 to $60,000 a year for career civil servants—by between 4% and 8% for new employees.

The state projects the reforms will save $80 billion over 30 years, which isn’t chump change. Even so, state and local governments will pay about as much on pensions in the next five years alone. Since these reforms apply only to future workers, pension costs will continue to grow, albeit at a slower rate. The savings are also dependent on lawmakers not goosing benefits once the economy recovers and the public isn’t looking. That’s what happened in 1983 after a pension fix seven years earlier.

Mr. Cuomo’s original pension plan was bolder, though still timid compared to the reforms New Jersey and Rhode Island Democrats passed last year that affect current workers and retirees.

Their need for political support from unions could make more Democratic politicians shy away from pursuing an aggressive pension reform agenda. But then they might face the wrath of voters who have to deal with, in Raimondo’s words, “[b]udgets that don’t balance, public programs that aren’t funded, pension funds that are running out of money, schools that aren’t funded …”

For more on public pensions, see here.