Study: RI pension bill ‘a good approach’ – and it may be legal

November 4th, 2011 at 10:00 am by under Nesi's Notes

Raimondo and Deputy Treasurer Mark Dingley

A leading Washington think tank will weigh in Friday with a mostly favorable review of the Raimondo-Chafee pension overhaul – and a crucial explanation of why its legality could be upheld by the courts.

“In general, we think this is a good approach,” Bill Tucker, managing director of the nonpartisan think-tank Education Sector and co-author of the new study, told WPRI.com. It focuses on two aspects of the bill: how it proposes to close the funding shortfall, and what sort of retirement the revamped system would allow.

Tucker said the bill as drafted avoids the two extreme pension fixes Education Sector has seen proposed elsewhere: fixing the system by slashing benefits for current workers to make them pay for retirees, as Illinois has done, or “basically casting teachers into the same retirement insecurity that a lot of the country faces.”

Education Sector’s study offers a more nuanced view – and a Rhode Island-oriented one – than the report issued Monday by the National Institute on Retirement Security, which defended defined-benefit pensions and criticized pure 401k-style defined-contribution plans. (The Raimondo-Chafee bill would combine both in a hybrid plan.)

Rhode Island’s current “pension system discriminates on the basis of age; it arbitrarily rewards certain ages and years of service over others,” Tucker and his co-authors – Jennie Herriot-Hatfield, Amy Monahan and Sarah Rosenberg – write in their study.

That has perverse effects, they argue: it rewards teachers for sticking around even if they’re burned out, and it penalizes those who enter the profession late, leave it early or switch states. It also ignores research showing that once teachers gain five years of experience, there is little difference in effectiveness as their tenure increases.

The Raimondo-Chafee bill would tackle those drawbacks, they say, because its hybrid plan “is both portable and age-neutral and moderates the employee’s risk by including a defined benefit.”

As for closing the pension fund’s shortfall, the Education Sector study says the Raimondo-Chafee bill “mostly succeeds in sharing the burden,” but adds: “Retirees bear the greatest load of all: as the years pass without a COLA, those with small pensions will see their buying power decrease.”

They offer some dramatic examples to show how painful the COLA freeze will be. In 2011 dollars, a retired teacher who currently has an annual pension of $59,395 would see it decline to $43,000 after 10 years and $33,300 after 19 years – a 44% drop – and a retiree with an $11,212 pension would be down to $8,400 after 10 years.

To deal with that, the authors suggest lawmakers amend the bill to “reintroduce COLAs more quickly for retirees with the smallest pensions” so “Rhode Island does not fix its finances by impoverishing its retirees.” And they remind legislators that raising taxes is always an option, even if they don’t like the idea.

For local pension-watchers, though, the most fascinating section of the study is the extended analysis of the pension bill’s legality by Monahan, a law professor at the University of Minnesota who is one of the nation’s leading experts on pension law.

Monahan thinks the proposed COLA freeze for current retirees is an “impermissible” violation of a contract right, which means the U.S. Supreme Court would only allow it for an important public purpose, “such as the remedying of a broad and general social or economic problem.” And she thinks Rhode Island could make a solid case.

Since that question is so pivotal to the pension debate and so hotly contested locally, it’s worth quoting Monahan’s analysis at length (emphasis mine):

A state’s “police power” refers to its power as a sovereign to act to protect the health, safety, and welfare of its citizens. Even where the state is bound by a contract, as in the case of COLAs for Rhode Island’s current retirees, it always retains its police power. …

There are very few cases addressing detrimental changes to public employee pensions where the court has found a substantial change to be a valid exercise of a state’s police power. In a recent case in Minnesota, the court held that the state was permitted to temporarily reduce the COLA for public employee pensions as part of a broad plan to address plan underfunding pursuant to its police power. In upholding the COLA reduction, the court noted that all interested parties (current employees, retirees, the state, and the taxpayers) were sharing in the burden associated with remedying the plan’s underfunding, and that the court was hesitant to interfere with the apparently reasonable legislative judgment regarding the preferred method for addressing such underfunding. The court rejected the argument that the state needed to pursue other remedies, such as raising taxes, before reducing retirees’ COLAs.

The proposed pension reform legislation in Rhode Island has much in common with the Minnesota case: it declares that the state’s pension system has reached an “emergency state,” proposes a temporary adjustment, and seeks to share the burden across current employees, retirees, and taxpayers.

It is important to keep in mind, however, that there is no objective test that is used to determine whether a state may validly exercise its police power. Rather, it is always a fact-intensive, case-by-case inquiry.

So why did Education Sector take such an intense interest in the retirement system of the nation’s smallest state?

“It was a little fortuitous,” Tucker said. Last spring, the group commissioned Monahan to look at the legal landscape on pensions in five key states, and picked Rhode Island as one of them. “When things did move forward quick, we said, ‘Look, we need not just a legal analysis – we need to look at the plan, the entire angle.’”

Tucker said he thinks if a version of the Raimondo-Chafee proposal passes, it could serve as a model to other states. He noted Calif. Gov. Jerry Brown – who, like Chafee, is a liberal elected with significant support from teachers unions – has just proposed a surprisingly sweeping pension overhaul, too.

“We decided we really wanted to look at this very closely, because here is perhaps one of the really important case studies of a state trying to do this, and arguably trying to do this right,” Tucker said of Rhode Island. “There’s obviously a lot of political courage happening here – potentially. We’ll see.”

The full study is available as a PDF on Education Sector’s website.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

(photo: Ted Nesi/WPRI)

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23 Responses to “Study: RI pension bill ‘a good approach’ – and it may be legal”

  1. Pat Crowley says:

    The Broad Foundation? The Gates Foundation?

    http://www.educationsector.org/page/our-funders-and-finances

    By the 1% For the 1%…..of course they think cutting the pensions of working people is a good idea.

    1. Cosmo says:

      Don’t you get it, the state is out of money. And people such as myself are sick and tired of having our taxes raised to pay for benefits that should never have been promised. This has to be fixed and it has to be fixed now, anybody with education and/or ability to earn a good salary is getting the heck out of this sewer. If it’s not fix now, the 1% in RI will be illegal aliens and fast food workers and you won’t be able to finance public employee pensions on their backs.

    2. ProJo Login says:

      The day Pat Crowley and all the other union officials scale back their salaries to the same amount made by a step eight teacher and move their own retirement goose eggs into the same pension system as the people they “represent” is the day anyone should start paying attention to all their blather about how much they care for the poor “workers” whose dues money they live off of. The Marxist BS deserves a rest.

  2. Kevin (Burrillville, RI) says:

    Before we go to extremes, screwing the workers who have given the money that their contracts said they had to. Why don’t we look into who Pensions that have been given to Legislators, Judges and special Interest groups. Why don’t all the people in the pension pay the same percentage and get the same percentage for the same years of service. Example:
    All the police, fire fighters, teachers and DPW, Sewer Commission, politician and Judges would all put 10% of their pay into the pension system and their employee would contribute another 50% of that or 5% of all monies they earn. Can’t collect a pension until 55 years age and then only for what you worked. If you want to collect COLA you must put an addition 1% into the pension from Day 1. No one will get 100% pension. No pension will exceed 70% of the workers’ ten Best Average years of service with Overtime, as long as they pay into the pension based on their overtime.
    We should have a state law stating that the state, nor towns’ can borrow from the pension system at anytime for any reason, it is not their money to mess with. One final question is it true that the State Pension Plan was borrowed from to pay for the banking crisis? If so, was the money returned? When was is borrow and when was it returned with the amount of money it would have earned the Pension System if were invested all that time? Where can we find these answers? Why doesn’t the Providence Journal or Channel 12 do some serious investigations like this on Pensions?

    1. Tough Love says:

      Interesting comment, but you obviously don’t understand the HUGE cost of Public Sector pensions. A 70% of pay pension with annual COLA increases to a 55 year old after 30 years of service would cost a level annual 45% of pay to fully fund that person’s pension over his/her working career.

      YUP …45% of pay every year.

      Their is NO ANSWER other than ending these grossly excess pensions for future service …. for CURRENT (yes CURRENT) workers. And THAT only stops digging the hole deeper. It doesn’t begin to address how to deal with the existing unfunded liability for already accrued pensions for PAST service.

      1. GaryM says:

        Kevin

        Tough love is right. Working from age 25 to age 55 with roughly a 4% annual wage growth (includes longevity) per year never gets you to the numbers you’re talking about. You’re thinking leads me to believe you calculated as if you make the same salary every year for that 30 year period, but you don’t. Then there is the crappy rate of investment return moving forward vs the prior years of 9% we once enjoyed. It isn’t going to happen again. All we’ve done since 2008 is bounce off the bottom of a drop to 666 in 2008-2009 in the S&P 500 which was once up around 1500 in 2007.

        Recalculate your numbers using the following assumptions: Mortality to age 87; a rate of investment return of 6%; annual wage growth of 4%. Then you will see what Tough Love is talking about.

  3. GaryM says:

    Perhaps this will get to the issue of who gets to stand first in line during a state fiscal crisis.

    The argument, “we’re broke” may fall on deaf ears if it is shown that judges and state troopers did not “equally share in the pain”. Treas Raimondo may want to think forward as our counsel in the petition before the US Supreme court is asked “you seem to have ample cash to give the judges and state troopers a break, what gives?

    Counsel – “Oh but your honor, we realize that we were broke, but not that broke!”

    Justice – “Well just how broke do you have to be to realize that the annual trip to Disneyworld is off the table?”

    Counsel – “Well it’s like this your honor, as you know, it’s a matter of the most bang for the buck, and judges in RI bang less, uuh, I mean give less bang, uuh, I mean are more important, uuh I mean… well forget about that argument! We just decided to still take the trip to Disney. Is that OK?

  4. Altin says:

    Wow, might even be legal, huh? Might not be also. Last week Ted found someone who told him if it’s illegal, no problem, just ignore the judge. Maybe next week’s highbrow discussion can be: “aliens could come down out of the sky and shoot all the judges, then no one could say it’s illegal”. I’m sure you can find a “study” that finds this plausible.

    1. Jim Donahue says:

      Well it seems the courts will end up sorting it out in the end but one has to consider that the powers that be have already had this issue looked at by those that will in the end make or break the state’s case.

      Certainly in the interim the unions will likely get an injunction on these actions – IF indeed this is even approved by the GA.

      RI is heading into nearly uncharted waters here. An esoteric legal zone so to speak.

      1. Ted Nesi says:

        Jim, do you think the unions will be able to get an injunction to delay the changes? I’ve been wondering about that, because it would throw a *huge* monkey-wrench into the state and municipal budget processes this winter and next spring if so. I’m not sure whether they’d budget for FY13 with the pre-bill contributions or the post-bill ones.

  5. ken says:

    The state is going to have to defend bidding on Rocky Point property when there’s no money. They will have to defend giving illegal’s in state rates when there’s no money ect….Should be interesting.

  6. GaryM says:

    I just read Amy Monahan’s Jan 2011 interview with the Federal Reserve Gazette of Minn. It appears that what is being perceived by RI doesn’t seem to be what she is saying:

    “In states that protect public pensions as contracts, the police power will allow changes provided that the changes are reasonable and necessary to serve an important public purpose. This is actually a very difficult legal standard to satisfy.”

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4616

    The issue is the RI gamble on a legal interpretation of what is “reasonable and necessary” which she admits is a “very difficult legal standard to satisfy”.

    I’m all for change, but not a legal long shot! Did we pay for this opinion? I hope not.

  7. Rlewis says:

    And don’t forget we’ve lowered the top income tax rate. It’s going to be hard to argue that we are fiscally strained when taxes have been cut for the “job creators”.

  8. Jim Donahue says:

    The state cannot have things both ways. They need to show that they have done enough to warrant what they are looking at doing to the retirees. At the same time they cannot push the private sector taxpayer out of the state because that will make the real estate here worthless.

    What cuts were made in this years budget?

    It seems like they (once again) tried the old we’ll cut back on the things that people will see as unassailable – the disabled. This way they can say well we tried to cut and there was too much opposition. They never cut back on what the voters want them too. Their salaries – their benefits – their 90k a year part time helpers etc etc.

    It’s a catch 22 in some ways. The state cannot cut taxes and they cannot raise them either. I really see this as the state made its decisions with blinders on and now they are being forced to live with their lack of fiscal responsibility. It is coming back to haunt us all.

    1. GaryM says:

      “They need to show that they have done enough to warrant what they are looking at doing to the retirees.”

      Jim you hit the nail on the head in this debate. If this were a bankruptcy, the court would ask the petitioner, “show me where you have already cut expenses to the bone and who is certifying the fat cutting”?

      Can anyone actually believe that RI could certify that it has finished cutting costs to the bone.

  9. Tough Love says:

    Quoting …”Tucker said the bill as drafted avoids the two extreme pension fixes Education Sector has seen proposed elsewhere: fixing the system by slashing benefits for current workers to make them pay for retirees, as Illinois has done, or “basically casting teachers into the same retirement insecurity that a lot of the country faces.””

    Oh …. so “educators” must avoid …”..the same retirement insecurity that a lot of the country faces.” Sounds like “the rest of the country” mean Private Sector Taxpayers.

    Oh … so what good enough for the 85% of the population that aren’t Civil Servants (including “educators”) isn’t good enough for “educators” … even thought WE (the taxpayers) pay for YOUR pensions ?

    Why ? Are “educators” special and deserving of better pension and benefits than those that pay their way ?

  10. Tough Love says:

    Quoting …As for closing the pension fund’s shortfall, the Education Sector study says the Raimondo-Chafee bill “mostly succeeds in sharing the burden,” but adds: “Retirees bear the greatest load of all: as the years pass without a COLA, those with small pensions will see their buying power decrease.””

    Sorry, but as a Private Sector Taxpayer, to put it bluntly, this loss of COLA being a “great burden” is a too sided coin.

    You see, Private Sector Pension Plans NEVER EVER include an automatic annual COLA. So from OUR prospective … and that should count since WE (the Taxpayers) pay for Civil Servant pensions …. consider the COLA benefit that you’ve been getting (on our dime) as something that should never have been there in the first place.

    So, in my view (as a Private Sector taxpayer) you aren’t taking on a “great burden”, you’re just losing something you never should have had in the first place.

    1. GaryM says:

      Tough love-

      There is another issue not discussed. Public sector workers have enjoyed regular cost of living and longevity pay increases that have all but disappeared in the private sector. That is computed 100% into the final pension. Consider what the state actuary plugged in for an assumption on across the board pay increases for every year. If you geometrically average what the actuary is assuming, a state worker will get around 4% per year, and a teacher will get around 6% per year (key term – geometrically averaged including longevity).

      Yes, the COLA’s are taken, but those raises have not been removed out of the equation and taxpayers pay 100% of that cost. I for one would have preferred we just got out of the defined benefit pension business altogether (just like the private sector is doing).

      1. Tough Love says:

        Garry, Getting out of the DB Plans (for future service … VERY difficult to reverse what’s already accrued for Past service) would stop digging the hole deeper, so this is indeed appropriate (when compared to what the Private Sector gets) just, and necessary.

        But we still need to address the unfunded liability for past service … a HUGE problem in many places. Considering that most of these excessive pensions were granted BECAUSE OF campaign contributions and election support in exchange for favorable votes on pay, pensions, and benefits, I have no problem with actives and retirees sharing substantively in this burden. Elimination of post-retirement COLA increases is only a portion of the contribution that should come from this group. A more appropriate share would be to reduce their pensions by the portion in excess of what would have been granted in the absence of the collusion between the Public Sector Unions and our elected representatives. Remember, nobody at the “bargaining table” appropriately represented Taxpayer interests.

        The likelihood of the latter happening (in the absence of a HUGE and clear lack of funds) is VERY VERY slim. Even freezing the DB Plans for future service for actives will be VERY difficult …. but that’s a fight the Taxpayers MUST engage in … if the endless increase in taxes is to end (or at least slow down).

      2. GaryM says:

        Tough Love -

        I understand, but I’m concerned that some of what we are doing are the same long shot gimmicks that got us here in the first place.

        For example, I think if the Treas is going to claim that raising the retirement age from 62 to 67 doesn’t push expenses back to local property taxes, she might have demonstrated this by a specific example on one towns 10 year school budget.

        I did do the numbers for the town of Barrington using actual FY 2009 salary data. I should not have had to do it, it should have already been packaged for taxpayer review. The net is that it is a money loser for property tax payers due to shifting the “in/out” career cycle forward by 5 years.

        Then there is the problem that if the investment rate of return falls to a long term 5%, the hybrid proposal saves the taxpayer $0 dollars (i.e. it will cost just as much as we are paying today) Taxpayers don’t want that risk in these hard economic times if they themselves have no such protections.

  11. Tough Love says:

    The key is that the workers should get the same pension at age 67 that they would have gotten at age 62, not a bigger pension. This will clearly result in a savings.

    However, unless this change includes most of the actives (say those currently age 55 or below), the savings is too little and too far down the road.

  12. [...] and the legality of this reform specifically. And that may make all the difference, according to pension law expert Amy Monahan (emphasis mine): In a recent case in Minnesota, the court held that the state was permitted to [...]

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