How the pension law’s automatic provisions mirror Obamacare

December 4th, 2012 at 1:25 pm by under Nesi's Notes, On the Main Site

A little-discussed part of last year’s landmark pension law was a section called the Rhode Island Pension Protection Act, which aimed to tackle the concerns highlighted by defined-benefit critics such as Josh Barro, and which won praise from Rhode Island AFL-CIO President George Nee.

The Pension Protection Act says the state Retirement Board or its actuary cannot “change actuarial methods for the sole purpose of achieving a more favorable funding or fiscal result” – as happened in 1990, when former House Speaker Joseph DeAngelis pressured the Retirement Board into raising its investment return forecast so lawmakers could balance the budget with a smaller pension contribution.

“Politics hasn’t been good for the pension fund,” Treasurer Raimondo said at a RIPEC forum in October 2011. “I can’t redo the past. I can make it better going forward. The bill we provide fundamentally restructures it. It puts self-correcting mechanisms into the plan.”

In an effort to prevent future lawmakers from allowing a funding gap to grow, the act says that if a pension plan’s funding level falls below 50.1% or declines for five years in a row the actuary must provide the Retirement Board with five to 10 options for getting it back on track. The General Assembly must choose one of them by June 30; if lawmakers don’t act, the default option will take effect automatically.

Here’s how Raimondo described the idea at a briefing for reporters the same month:

It is designed to … self-correct over time, and in essence remove many future pension decisions from the political process so that should there be a need in the future for changes, they will happen automatically. … We’re moving from the political to the actuarial. Never again do we want to be in a place where politics dictates or has the ability to weaken our pension system.

The theory behind the Pension Protection Act is similar to the one that led President Obama and Congress to include in the Affordable Care Act a new Independent Payment Advisory Board, a 15-member panel tasked with holding down Medicare costs, as Kaiser Health News explains:

Beginning with fiscal 2015, if Medicare is projected to grow too quickly, IPAB will make binding recommendations to reduce spending. Those recommendations will be sent to Capitol Hill at the beginning of the year, and if Congress doesn’t like them, it must pass alternative cuts – of the same size – by August. A supermajority of the Senate (at least two-thirds of those present) can also vote to amend the IPAB recommendations. If Congress fails to act, the secretary of health and human services is required to implement the cuts.

In both cases, the idea is to force elected officials’ hands by changing the political system’s default response from inaction to action when there’s a fiscal problem at hand. (Though it’s now the law, this approach is still controversial.) And this isn’t the only way the pension law is like Obamacare.

• Related: Barro: RI came closer than most but didn’t fix pension problem (Dec. 4)

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2 Responses to “How the pension law’s automatic provisions mirror Obamacare”

  1. [...] fairness to Rhode Island’s leaders, they didn’t ignore the risks outlined by Barro. (More on that in this post.) In the meantime, it’s possible all sides could unite behind at least one of the proposals in [...]

  2. Al Moncrief says:

    If you do not like the terms of a contract, do not become a party to that contract. Once a party to a contract you are bound by its terms. That should not be so difficult for you to comprehend.

    It’s not “math,” it’s “contractual obligations.” Why is the RI Legislature not calling for breach of its corporate contracts? Why are public employee contracts the first target?

    COLORADO COURT OF APPEALS CONFIRMS COLORADO PERA PUBLIC PENSION COLA BENEFITS AS CONTRACTUAL.

    The Colorado Court of Appeals has reversed and remanded an initial District Court ruling that denied the contractual status of public pension COLAs in Colorado. The Court of Appeals confirmed that Colorado PERA pension COLA benefits are a contractual obligation of the pension plan Colorado PERA and its affiliated public employers.

    A huge victory for public sector retirees in Colorado! The Colorado Legislature may not breach its contracts and push taxpayer obligations onto the backs of a small group of elderly pensioners.

    The lawsuit is continuing. Support pension rights in the U.S. by contributing at saveperacola.com. Friend Save Pera Cola on Facebook!

    In 1977, the (U.S.) Supreme Court clarified that state attempts to impair their own contracts, ESPECIALLY FINANCIAL OBLIGATIONS, were subject to greater scrutiny and very little deference because the STATE’S SELF-INTEREST IS AT STAKE. As the court bluntly stated:

    “A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all . . . Thus, a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors.”