Pension Reform Necessary, but Not Easy

Rhode Island has made three attempts at pension reform in the past three to six years. But last year when lawmakers considered the issue once again, they decided to make it a complete reform, said Richard Licht, Rhode Island director of the Department of Administration.

“We set out saying we’re going to do this comprehensively and the last time hopefully we ever have to do it,” he said Thursday during the Fiscal Chairs Forum.

The changes affected everyone who is a part of the public employee pension system, including existing retirees. In making the changes, Rhode Island policymakers noted that it would take a shared sacrifice from retirees, current employees and taxpayers, Licht said.

And it took leadership. Licht said the governor, treasurer, house speaker and senate president all made important contributions. While there were some disagreements, “there was a commitment to collaborate to get it done,” he said.

Among the actions Rhode Island took to right its pension ship, the state:

  • Changed the formula for cost-of-living adjustments from a 3 percent per year hike to a COLA based solely on investment return. No COLAs will be given until the fund is at least 80 percent funded, which could be as long as 19 years;
     
  • Changed the retirement age. For those who are vested in the system, that went to Social Security retirement age, but no older than 67; and
     
  • Created a hybrid plan, moving from solely a defined benefit plan to a combination defined benefit-defined contribution plan.

Others attending the forum shared insights into actions their states have taken to address the growing pension shortfall problem.

Pension funding has fallen short in many states for several reasons, one of which is the generosity of state officials when the markets were good, said Grant Boyken, pensions and benefits officer in the California State Treasurer’s Office.

“During boom time at turn of century we had benefit enhancement,” he said, “followed by a decade unprecedented market downturn, which makes it more difficult to pay for those benefits.”

On top of that, he said, the California Public Employees Retirement System, or CalPERS, experienced a number of scandals related to placement agents, a third party who is paid by a money manager to raise capital from institutional investors like pension systems.

The state changed its laws to require more transparency of the use of placement agents and classified them as lobbyists.

“This is one of the issues that go to credibility of pension systems at a time when reform is such an important issue,” Boyken said.

Changes to public employee pension plans don’t come easy and are often challenged in court. But Oregon Sen. Richard Devlin, co-chair of the Joint Ways and Means Committee, said they are necessary.

“As we all know, the pension systems are evolving, not static,” he said. But Devlin cautioned, “If you get involved in this, I hope you have the best legal counsel you can obtain and the best actuarial support you can obtain. Please don’t get people who want to agree with you, because you need to hear the entire story.”