Katherine Gregg’s Providence Journal article on Rhode Island’s pension fund losses has an interesting frame. Toward the beginning (emphasis added):

Despite this recent run of losses, state officials say there is no immediate danger for state and local employees and teachers whose retirement checks are drawn from the pension fund, which is made up of a mix of investment earnings, taxpayer contributions and employee contributions. These retired public employees are guaranteed pension payments for life, regardless of the stock market’s performance.

And the final word is given to Stephen Laffey, who (Gregg notes) is “weigh[ing] a return to politics”:

“I have said many times that the only way to save the pension system is to end it and give everyone their money and go to a 401(k) plan … like the people in the private sector,” Laffey said in an e-mail.

The question — over which the unions will shed blood, if necessary (although probably figuratively) — is who bears the risk. When the market shrinks beyond reserves, or simply does not live up to the excessive requirement of more than 8% growth, either retirees manage on less income or the state attempts to tighten the tax vice on a population that already feels overtaxed (with ample justification). Moral considerations aside, the latter option is simply not functional; folks working in the private sector are not going to idly watch their money flow to retirees, many of whom are taking home more than they are, and employers are not going to accept the escalating costs associated with operations in Rhode Island.
Probably the most important point to emerge from the article is that inadequate half-measures aren’t going to cut it:

But the market losses have already eliminated any possibility of taxpayer savings this year from state lawmakers’ decision to curb annual cost-of-living increases and institute a minimum retirement age for all state pensioners. As state budget officer Rosemary Gallogly explained Wednesday: “The rate of payroll determined for FY2010 will not change as a result of pension fund performance.”

Mr. Laffey, in other words, is absolutely correct: The two possibilities are (1) drastic changes or (2) the collapse of the pension system, bringing the state with it.