Raimondo: Plan Will Solve Pension Crisis 'Once and For All'

The pension reform plan will "solve the problem once and for all," ending decades of unfunded pension plans leading up to the current crisis, according to General Treasurer Gina Raimondo.

The treasurer defended the plan she and Gov. Lincoln Chafee crafted before the joint House and Senate Finance Committees Tuesday evening. She told the legislators she and her staff spent countless hours vetting the legislation and poring over the state's historic pension numbers to come to a bill she said saves Rhode Islanders billions of dollars, provides security for retirees, and ensures the pension system will never reach crisis level again.

"The system we have proposed is fair," Raimondo said. "This bill will solve the problem once and for all. If we don't do this comprehensively enough, we'll be back here in two or three years."

The reform proposal includes suspending the Cost of Living Adjustment — an automatic raise for all retirees that matches the rate of inflation — for up to 19 years; changing the retirement age from its current 62 to match an individual’s Social Security age; and adding a defined contribution plan, similar to a 401K common in the private sector. State employees and teachers would contribute 3.75 percent of their pay toward a pension, for which vesting requirements would be reduced from 10 years to five years. They will also contribute five percent of pay into their own retirement account and the state would contribute an additional one percent to that account.

Chafee and Raimondo have said there would be serious consequenses if the Legislature failed to act, including:

• Doubling of taxpayer costs next year to more than $600 million and more than $1 billion in about 10 years. Much of the increase would likely be passed onto municipalities, which pay for 60 percent of teacher pensions.

• Increases in both state taxes and local property taxes, coupled with budget cuts.

• An increased risk that the pension fund will run out of money before many  employees reach retirement.

• A possible downgrading of state and municipal bond ratings, increasing the cost infrastructure projects.

Some — notably union leaders — have criticized Raimondo, saying she inflated numbers to exacerbate the pension problem. They have proposed  a reamortization — essentially a refinancing of pension debt — from its current 19 year plan to 30 years, which they say will make up almost all the shortfall. The state plan calls for a 25-year reamortization.

Some unions have also proposed lowering the expected mortality age from the 87 the reform plan assumes to 78, and increasing the expected rate of return on state investments. Those two provisions, they say, would largely solve the problem without impacting retiree benefits.

Those numbers simply don't work, Raimondo said. The state is assuming a return on investments of 7.74 percent, the "high end" of what can be predicted, she said. Actual returns have been much lower in recent years. The state's return over the last 10 years has been 5.74 percent. Over the last five, it has been 1.52 percent. And so far this year, it is -3.39 percent.

"We are investing in an extremely difficult market," Raimondo said. "It would be imprudent to raise the anticipated rate of return. It would be greatly irresponsible to assume a rate any greater than 7.74 percent."

Earlier Tuesday Cranston Mayor Allan Fung and Providence Mayor Angel Taveres requested the bill be amended to allow municipalities to suspend COLAs for retirees outside the state pension system, which they say is the only way to afford funding the pension plans, something the reform bill would require witin 10 years. It wouldn't be prudent to consider the pensions outside the state plan because they haven't been vetted to the entent the state plan has, Raimondo said.

The plan she proposed would fund state pension plans by 70-80 percent — the range considered healthy — and ensure the long-term health of the state pension system, Raimondo said. Notably, the reform plan spells out how taxing the pension problem is and how critical it is to solve, she said.

"To pretend the problem is smaller than it is only hurts the beneficiaries," Raimondo said. "We didn't create the problem. We revealed the scope of the problem."

The Finance Committees will consider the legislation and hope to have a decision by Thanksgiving.