A Welcome Update on Pension Reform
[With apologies for prematurely putting up the rough outline of a beta verison of a draft of this post earlier this morning.]
Yesterday, in a briefing by Deputy Treasurer Mark Dingley to the State Retirement Board, we got more details as to the pension reform plan to be proposed by the Governor and General Treasurer – in particular, the heretofore unclarified issue of how far simply suspending the COLA will get us. If someone hasn’t misallocated a decimal point or forgotten to carry the one, it appears to take a decent bite out of the shortfall.
(In depth coverage courtesy WPRI’s Ted Nesi.)
It would immediately raise the pension system’s funding level from 48% to 62%, [Dingley] said. …
Under the actuary’s proposal, COLAs would be suspended until the system is 80% funded, which could take 12 to 15 years. “So it is a long period of suspension,” Dingley said.
The bad news, which we’ll get to in a second, is that re-amortization is still on the table. Staying with COLA’s, however, the question that I have at this point is, why are we taking so long – twelve to fifteen years, assuming a far from guaranteed 7.5% rate of return – to get to 80% funded? Is this responsible? How will rating agencies view this timeframe? How much does it unnecessarily add to the cost of pension reform?
Now as to reamortization. It needs to be removed altogether from the mix; firstly and principally, because it is like a freshly opened box of chocolates. Delicious and tempting and easy – I’ll have just one right now and save the rest for later. Okay, just one more. Ooo, is that a caramel??? Before you know it, the box is empty, reamortization is the bulk of the solution and Rhode Island taxpayers have been forced to gouge on the price of a benefit that at no point was ever reasonable or remotely sustainable.
Which leads us to the second reason reamortization should not be on the table. It is perhaps the largest instance of a recurring budget theme around the state and on Smith Hill: the problem is not lack of revenue but too much spending.
How do we know that revenue is not lacking? The ranking of our tax burden – fifth highest combined state and local taxes.
As for the spending, vis a vis the pension system. The biggest factor of the pension shortfall is not a lack of contributions by employees; not a lack of contribution by the employer (though this is certainly a factor – has anyone from the GA leadership explained why, for over a decade, Rhode Island social programs offered the maximum benefits permitted under federal law?); not an occasionally spotty performance by an investment fund at least partially dependent upon the vagaries of the stock market.
No, by far the biggest contributor to the state’s unfunded pension liability has been that the promises made to future retirees were eye-poppingly unrealistic (e.g., retire immediately after twenty years of service [no longer an option but with plenty of retirees grandfathered into the system] and start collecting a defined benefit; amount of pension based upon the final three years of wages which, in turn, were too often jacked up by an excessively generous overtime clause.)
It is there, then, that additional adjustments must be made.
Deputy Treasurer Dingley characterizes this proposal as
a starting point
In fact, from the perspective of retirees and vestees, it should be a nirvana-like ending point. If a suspension of the COLA is the sole sacrifice needed from the retireee to fix the worst pension shortfall in the country, they should be lining up to kiss the General Treasurer’s feet.
Don’t start that queue just yet, however. For the taxpayer who has never stopped sacrificing, this proposal is just a starting point. We need to start walking back from the fifth highest tax burden nationally. That’s never going to happen if 1.) a larger adjustment is not made to current retirees’ benefits and 2.) reamortization is not taken off the table and out of the reach of temptation.
About this proposal, Deputy Treasurer Dingley observed,
We received a lot of feedback on this.
Let the feedback continue.