Rhode Island’s Bold Pension Reforms Point the Way Forward

To describe pension reform, Utah State Senator Dan Liljenquist put it best: “This is not a conservative-versus-liberal issue, this is a reality issue.” Liljenquist helped his state face up to the reality of its underfunded public employee pensions by leading a successful reform effort. Utah is a fairly conservative state, but some far more liberal states are also tackling their pension problems — and not just to prove Liljenquist’s point.

Rhode Island lawmakers have been especially bold. Thus, the Manhattan Institute’s awarding of its Urban Innovator award to Rhode Island State Treasurer Gina Raimondo is well deserved. As the Manhattan Institute’s Josh Barro explains in the Washington Examiner:

Before reform, Rhode Island had one of the largest pension funding gaps in the country, relative to its size. Absent reform, the state would see required pension contributions double in two years. While other states could kick the can down the road, Rhode Island had no choice but to clean up the mess.

Raimondo put forward a plan that would get the state’s pension costs under control and reduce the risk that further funding gaps would appear in the future. In order to do this, her plan had to differ in a few ways from those seen in most states.

First, reforms apply to future earnings by existing employees, not just to new workers. Unlike in states that have limited pension reforms to new or non-vested employees, this means that Rhode Island will start realizing substantial savings immediately because of the lower cost of the new system.

Second, investment risks in the reformed pension plan will be shared between employees and the government. In a traditional defined-benefit plan, employee benefits are fixed and taxpayers bear all investment risk, which is how states have ended up with such large unfunded liabilities.

In Rhode Island, new pension benefits will be split between a defined-benefit plan and a 401(k). Additionally, the defined benefit will include a cost of living adjustment mechanism that exposes workers to a portion of the pension fund’s over- or underperformance.

Yet reform in Rhode Island may not be done yet. Now Governor Lincoln Chafee, an independent and former Republican, is working to help cities in his state get a handle on their pension costs, which have already done enormous damage.

In August 2011, the City of Central Falls, Rhode Island, about six miles north of Providence, declared bankruptcy. In state receivership for a year at the time, the city could not afford to pay $80 million in retirement benefits to 214 polices officers and firefighters—an average of around $373,000 per retiree. Rhode Island lawmakers are trying to see that scenario repeated.

Over the long term, reining in out of control pension costs can go a long way to bring the overall growth of government under control. Overly generous pensions are the lifeblood of government employee unions, which today are a permanent lobby for ever expanding government.

For more on public pensions, see here.