The information outlined below is based on the Rhode Island Retirement Security Act of 2011, a law enacted November 18, 2011.
Although the state made contributions “in accordance with law” prior to 1986, the state did not follow proper actuarial standards until 1986. Accordingly, it was not properly calculating the amount of contributions necessary to fund the plan. Since 1986, however, with the exception of a partial contribution in FY1992 during the Depositors Economic Protection Corporation (DEPCO) credit union crisis, the state has made all actuarially required contributions as required by law. Likewise, state employees and teachers have made their contributions as required by law.
However, making contributions as required by law and contributing enough to cover benefit costs are two different notions. Improperly funding the pension system is not a new problem. Sadly, this crisis was created decades ago, simply because no one bothered to calculate costs with honest and accurate numbers.
No. The problem is that the system was designed poorly and that legally required amounts were based on bad numbers, leading to no one putting in enough – taxpayers or employees. Decades of relying on unrealistic numbers continually underestimated the true cost of these benefit levels. Using unrealistic numbers means there was never enough put aside. The result is everyone is stuck with a huge, unaffordable bill.
The failure of the state’s pension system to significantly improve its funding status during the past 25 years is principally due to:
In FY1992, during Rhode Island’s credit union (DEPCO) crisis, the state failed to contribute its full actuarially required contribution (ARC). This improper act was addressed in FY 1995 and the state has made its full ARC in every subsequent year. In 2007, the system’s actuaries calculated that the impact of this improper act, however, was limited, accounting for less than 1 percent of the system’s unfunded liability.
Rhode Island’s state pension system was approximately 55 percent funded as of its June 30, 2007 plan valuation. At that time, before the 2008 market crash, Rhode Island’s retirement system ranked among the worst funded of all state plans. The market crash and the 2008 Great Recession clearly exacerbated the situation. The system will likely continue to feel the effects of the market crash for the next few years because accounting techniques allow the state to spread this problem out over time. However, the underfunded status of the pension system has been decades in the making and it will take many years to properly address.
It can be stated with some confidence that retirees and employees who received substantial retroactive pension benefit increases in the 1960s, 1970s and 1980s did not contribute their fair share. Employees do contribute a percentage of their salary (8.75 percent to 9.5 percent) to the system; however, this amount is not enough to cover the cost of their retirement benefits. The state employee and teacher contribution rate is fixed in statute and is controlled by the General Assembly.
The taxpayer-supported portion of the pension is paid through the general revenues of the State of Rhode Island. Current trends show this percentage increasing annually. Also, these rates do not include rates for Social Security or other post-employment benefits such as healthcare.
Creating a new system for new employees only will have no impact on the system’s unfunded liability. The plan’s unfunded liability, currently estimated at $6.8 billion, represents the unpaid bill for services rendered by state employees prior to June 30, 2010. Almost 75 cents of every dollar contributed to the plan, including both employee and taxpayer contributions, goes to pay for this unfunded liability. Of the total pension costs – projected at approximately 44 percent of salary for FY2012 – approximately 33 percent of salary goes to pay for past service. A change in the plan rules for new employees will not have any impact on these substantial prior service costs.
The most recent General Assembly reforms have been factored into calculating the $6.8 billion unfunded liability and contribution rates of approximately 44 percent of salary. While prior changes were moves in the right direction, these reforms principally address changes in future service. These reforms are not strong enough to adequately reduce the plan’s unfunded liabilities.
The annual taxpayer-supported contributions are paid through the state’s general revenues. Remaining on its current course, the taxpayer-supported contributions will continue to grow, ensuring that the system will be fully-funded in about 19 years. Keeping with this policy, however, means that the state must both radically cut vital public services (education, transportation, infrastructure, etc.) and raise taxes to meet the ever-increasing pension benefit price tag. Staying the current course means $1 billion of the state’s general revenue will be required to fund the pension system in 2022.
No. At a total cost of approximately $27 million, disability pensions account for only 3 percent of all pension payments. However, any instance of suspected fraud or abuse weakens the pension system for all Rhode Islanders and must be addressed.