“The bill doesn’t come due until well after the legislators who wrote the check have left office”

Thus describes an Illinois state Senator the challenge states face in reforming their public employee pension systems. Given that reality, it’s astounding reform would ever succeed. But succeed it has, in states with very large pension shortfalls that threaten to blow up their budgets.

Staring into the financial abyss, it seems, can help politicians overcome their strong temptation to offer generous benefits to their supporters — government employee unions in the case of pensions — and passing off the bill to future generations. Yet, government unions will defend their benefits even in states in extreme financial distress, as the recent Rhode Island pension settlement shows.

On February 14, Rhode Island officials reached an agreement to end six legal challenges to the state’s 2011 pension reform, the most far-reaching in the nation to date. The agreement scales back some of the savings in the 2011 reform bill, but  preserves most of them. Governor Lincoln Chafee and State Treasurer Gina Raimondo invested considerable effort and political capital in crafting and enacting the 2011 pension reform. So why did they agree to scale back any of it?

Because they had to. The state was forced into negotiating by a judge, ruling on a union legal challenge to the pension reform legislation. As Drew University political science professor Patrick McGuinn describes the decision in a new Brookings Institution study, “Pension Politics: Public Employee Retirement System Reform in Four States” (which points to Rhode Island’s reform as a model):

In December 2012, a Superior Court judge ordered the unions and the governor/treasurer’s office into mediation to resolve the dispute—an extremely unusual (and perhaps even unconstitutional) move.

In effect, the judge ordered the Chafee administration to negotiate with the unions to amend a law that had already been passed by the legislature and signed by the governor.

While legally dubious, the February 2014 agreement may be the least bad option in terms of achieving sound policy — which in the case of Rhode Island means preventing a budget meltdown. If a judge is willing to order the state government to renegotiate a law already on the books, who knows what might come next in court?

The agreement maintains most of the 2011 reform law, with a few modifications. As The New York Times reported at the time:

Under the Rhode Island Retirement Security Act of 2011 … annual cost-of-living raises for retirees were suspended until the state’s pension system became at least 80 percent funded, except for a single increase every five years. Under the new agreement, which came after more than a year of federal mediation, the increases will be every four years.

Employees with more than 20 years on the job will be able to opt to stay in their defined-benefit pension plan — rather than moving into the new hybrid plan — as long as they agree to a higher employee contribution, as much as 11 percent for state employees and teachers.

At the same time, the amount the state will contribute to the pension system each year will grow to about $510 million from $486 million under the agreement. And the so-called unfunded liability, the amount the state needs to put into the system to make sure that promised benefits can be paid for, will grow to $5 billion from $4.8 billion — though that is still well below the $7.1 billion level before the 2011 law.

An actuarial firm hired by the state to assess the proposed agreement estimated that it preserves 95 percent of the savings from [the] 2011 law.

For Rhode Island taxpayers, the deal seems like two steps forward, one step back. But not everyone was celebrating. Local officials raised objections over the process and the burden the deal’s give-backs would place on their budgets. Rhode Island League of Cities and Towns Executive Director Dan Beardsley put it thus:

Do I acknowledge that it will secure 95%? I’ll acknowledge that, but I’m someone who believes the state was justified by the Constitution to take the measures they did. Moreover, I’m astounded the General Assembly will have to swallow this in it’s entirety — they can’t make even one change, I find that mind-boggling.

For what it’s worth, the total cost increase may seem inconsequentially small to the administration overseeing an $8B budget, but tell that to the distressed communities, rubbing pennies together, like Pawtucket, and Woonsocket — try to explain to those communities that this is inconsequential …

The objections of Beardsley and other local government officials are valid, but they shouldn’t obscure the significance of Rhode Island’s pension reform.

In the end, the lesson is that boldness pays. Had Governor Chafee and Treasurer Raimondo not gone as far as they did in the first place, the Ocean State might still be stuck at square one.