Why Raimondo may be right to exclude the local pension plansNovember 14th, 2011 at 6:00 am by Ted Nesi under Nesi's Notes
Treasurer Raimondo has taken a lot of heat for pushing to do little about the 36 municipal pension plans outside the state system as part of the sweeping reform bill poised to pass this week. But last week the treasurer put forward a strong case on WPRI 12′s “Newsmakers” for why her reservations are valid rather than politically expedient.
Mayor Taveras and his allies have made a compellingly simple argument for expanding the Raimondo-Chafee bill’s proposed COLA freeze to encompass the so-called non-MERS plans, too: If the state is going to fix its pension shortfall in part by suspending COLAs, why shouldn’t the cities and towns do the same?
Raimondo’s response has been that they haven’t done the necessary work yet to prove the need for a COLA freeze. And that sounded disingenuous even to some of the treasurer’s fans. After all, umpteen reports have been issued examining the locally run plans. Funding levels are below 20% in Cranston and Coventry, and not much better in Providence. How can Raimondo possibly argue they aren’t in enough trouble to warrant a COLA suspension?
But that’s not what she’s saying. Here’s how Raimondo explained her position on “Newsmakers”:
You have to realize … what we’ve done to get to this point in the state-adminstered [pension system] reform has been 100-plus actuarial runs, meetings with all stakeholders, analysis of every aspect of the plan. …
The mayors … are very focused on a COLA suspension, which will solve their budget problems for a year or two or three. But the state could have done that, too – the state could have just said, let’s suspend the COLA and call it a day. That is not the way to do comprehensive pension reform.
They have to do the same hard work that we have done – analyzing every aspect of the problem, and then putting forth a comprehensive plan, which is what this piece of legislation calls for them to do.
It helps if you stop thinking about the specific policies in the pension bill and instead think about the process Raimondo has been engaged in this year.
The treasurer came into office and identified the problem. She ordered the new actuarial assumptions, and the Retirement Board approved them. She wrote a report explaining the problem. She and Chafee convened the pension advisory group, which did a huge amount of homework – much of it behind closed doors – to figure out which approaches would work and which wouldn’t. She then put together a top-to-bottom overhaul of the pension system that sets out a permanent fix and calls for sacrifices from all stakeholders. She got the top three state leaders – Chafee, Fox and Paiva Weed – to support it. And now she’s set to get the General Assembly to sign off on the plan.
Raimondo is a lawyer, and – with an eye on the inevitable court battles to come – she’s spent 2011 methodically building the most persuasive case she can to support the need for dramatic pension changes in Rhode Island 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 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.
If that’s the legal standard, it’s hard to see how Taveras and Fung can make the same case as the state for a COLA freeze in their plans. Providence’s leaders only kicked off their pension reform process last month, and the city is still banking on an 8.5% investment return. Neither of their cities has put together a top-to-bottom overhaul that includes a COLA suspension as just one piece of a broader plan. Considering they’ve lost in court before, it’s clear the cities and towns – just like the state – will need to meet a high standard for a major pension overhaul to pass legal muster.
The test for the mayors is whether they’re ready to do that. Will Taveras break promises he made to the city’s unions in contracts signed just last spring? Will Fung tell his police and fire personnel hired before 1996 that there isn’t enough money in their pension plan, so he’s going to shut it down and cut them a check for whatever money is left? And will they convene their own local pension advisory groups after next April’s soon-to-be mandated actuarial valuations?
As for Raimondo and Chafee, the test for them is whether they’re willing to overcome pension fatigue and put the same energy and political capital into helping the mayors find a solution to their problems – one that doesn’t involve following Central Falls into Chapter 9.
All that said, an immediate COLA freeze isn’t the only alternative to the weak tea the final version of the legislation offers on the locally run plans. (Just months ago, the General Assembly approved legislation to push local retirees into Medicare.) The pension bill could, for example, offer enabling authority for cities and towns to suspend COLAs once they conclude it’s necessary. It could remove pensions from the scope of collective bargaining, just as the state does. Instead, it creates a study commission, calls for actuarial reports by April 1, then says communities should come up with a solution.
Bottom line: the locally run plans will still be a mess the day after Governor Chafee signs the pension bill into law – which is why he called the finance committee’s version “substantial – but incomplete.”