The Conflicts of Governance that the Pension Reform Law Could Create

Predicting that the pension reform bill will be passed by the RI legislature mostly as reported from committee, Jim Baron of the Pawtucket Times has far and away come up with the best imagery for describing how the floor debate will likely play out...

Much like the budget process, individual legislators will be welcome to submit dozens of amendments, they will be able to argue about those amendments for hours on end, then they will get to watch each amendment peter out in a little puff of smoke, fall toward the earth and disappear without a trace, like the little twinkles of light from Fourth of July fireworks.

However, if H6319A/S1111A does pass as is, and if the provisions relating to endangered pension plans ever need to be invoked, serious constitutional ambiguities in the bill could create conflict within the legislative process.

On Monday morning, I put a series of questions by email to the Governor, the General Treasurer, and the House and Senate Leadership regarding the constitutional issues, figuring that the Governor would have a definite position on the possibility that his veto power is being nullified by the legislature, that the leaders of the House and Senate (especially the Senate Leader who was described in a recent newspaper article as being “fiercely protective of the Senate”) would have definite positions on the independent judgment of the legislature they lead being subordinated to a non-legislative board, and the General Treasurer would have on-hand some reasonable estimates relating to the likelihood of the constitutional oddities in the bill being triggered.

As of the time of this posting, I haven't received any specific answers to the questions posed. I do understand, with all of the lobbying and concern that this bill has generated, two days is a short period of time to expect answers to every question that could be raised about its content. But then, I'm not the one who decided on just seven days between the unveiling of the final version of the bill and its being voted on.

For the Employees’ Retirement System of Rhode Island (ERS), the Municipal Employees’ Retirement System of Rhode Island (MERS), the Rhode Island State Police Retirement Benefits Trust (SPRBT) or the Rhode Island Judicial Retirement Benefits Trust (JRBT), an "endangered status" pension plan will be defined in a new section 36-10.2 of Rhode Island law as a plan that...

(i) Has a funded percentage of fifty percent (50%) or less; and
(ii) The plan’s funded percentage has decreased for five (5) consecutive plan years.

When a pension system enters endangered status, 36-10.2 will require a process to begin where the state retirement board develops two "funding improvement strategies". One of the funding improvement strategies is called the "Default A" strategy which, according to the proposed law...

shall show increases in employer and employee contributions under the plan necessary to achieve the applicable requirements…assuming no amendments to reduce future benefit accruals under the plan.

The retirement board is also required to send the legislature a second funding improvement strategy. If the legislature doesn't approve the second strategy within a certain amount of time, the law states that Default A shall be enacted.

From a practical perspective, the first question to worry about (and that I put to the various RI government leaders involved with pension reform) is how likely is it that plans will enter endangered status, triggering the funding improvement strategy process...

1. Based on the current condition of the pension systems covered by the proposed section 36-10.2, how likely it is that the endangered status conditions will be met, i.e. over the course of the next decade, how many times should we expect the retirement board to be writing funding improvement strategies?

And if funding improvement strategies are ever to be used, the first constitutional and legal question that must be answered is...

2. Are the funding improvement strategies written by the retirement board intended to create legally binding appropriations, or recommendations only?

If the funding improvement strategies are only intended to be non-binding recommendations (and everyone involved agrees on this) then there aren't any further issues to worry about. However, if they are to become binding appropriations and carry the force of law, then the pathway of their creation and implementation raises a serious set of questions that need to be resolved before any pension plans enter endangered status:

• Does the phrase "shall be enacted" with regards to funding improvement strategies apply to the Governor as well as the legislature...

  3. If funding improvement strategies are legally binding appropriations, are they subject to a gubernatorial veto?

• Does the concentration of fiscal and lawmaking powers in the hands of the state retirement board create a problem (besides being flat-out unconstitutional, but since the political class in RI has a hard time understanding why this in itself is a cause for concern, I'll lay that aside for the moment)? Consider that the state retirement board controls the projected rate of return of the pension system. If that rate is reduced in the future, it would immediately increase the actuarial unfunded liability. If the actuarial unfunded liability is increased, it could immediately put several pension plans on a trajectory towards endangered status -- which means the state retirement board would have made the decision that gives itself the power to impose a "funding improvement strategy" on the legislature...

  4. If the state retirement board makes future changes to the expected pension-fund rate of return that increase the actuarial unfunded liability, then as a practical matter, unless the legislature acts immediately to raise the employer contribution to the pension system through the normal budgetary process, could the retirement board under 36-10.2 assume power superior to that of the legislature to determine how the new unfunded liability is to be addressed?

• Should Rhode Island's earlier experience with a union-dominated retirement board being able to bypass the regular legislative process and create its own benefit plan, highlighted by Tom Mooney of the Projo a few weeks ago, raise a red flag...

  5. Is there a risk that 36-10.2 will recreate, at the state level, the situation that existed in Providence in the 1980s, where a municipal retirement board exercised direct authority to determine benefit levels, leading to a fiscal and a good-government imbalance that contributed to pension-system problems still being faced today?

Unless the conditions defining “endangered status” are so unlikely they will never be met, or “funding improvement strategies” are only non-binding recommendations, this piece of pension reform is likely to create brand new conflicts and uncertainties. Until the extra-constitutional provisions are fixed, Rhode Islanders who are concerned about real pension reform will need to extend the scope of potential government mischief they keep watch for, to make sure that the process being created to give one group in society special powers to determine its own governmental appropriations isn’t wildly abused.