How pension reform shrinks R.I. deficit
Rhode Island Governor-elect Gina Raimondo rose to political prominence engineering a difficult pension reform in the Ocean State back in 2011. Now one of her challenges as governor will be grappling with a state budget deficit that, by her calculation, will be much larger if the courts overturn those reforms after a long legal battle.
Raimondo will take office facing a $190 million deficit in an $8.8 billion budget, of which about $3.5 billion consists of state revenues. However, the 2011 reforms, which reduced the state pension system’s unfunded liabilities by nearly half, cut the state’s required contributions sharply. This year’s contribution is $280 million. Without the 2011 changes, the state would have been required to pay $501 million in the pension system, more than doubling the current projected deficit.
But the state is not entirely in the clear yet. Some union employees and retirees have been challenging the law in court. Previous efforts at a settlement last spring broke down and the case continues to wend its way through the Rhode Island court system.
One interesting compromise would involve tax changes in Rhode Island that reduce or eliminate taxes on retirement income both for private and public workers, allowing government workers to retain more of their pensions in exchange for a settlement of the pension lawsuit. The only problem with such a proposal is that Rhode Island faces projected deficits for the foreseeable future, growing to double their current size by 2018. That makes tax cuts all the more difficult.
The original pension legislation raised the retirement age to 67, moved current workers out of the defined benefit plan into a hybrid plan that included a defined contribution element, and ended cost-of-living adjustments for pensions until (or if) the pension system got back to adequate funding.
A compromise deal that fell through earlier this year would change the retirement age to 65 and allow workers with 20 years of experience to remain in the defined benefit plan, though they will have to contribute several percentage points more of their own salary toward retirement for that privilege. The plan also granted COLAs to retirees once every four years. That was not enough of a giveback for some workers, who want their older, more generous plan back. That would make Raimondo’s efforts to balance the budget much harder.