Though Rhode Island’s current unfunded municipal pension liability stands at $2.1 billion, it only amounts to a fraction of the $7 trillion liability problem plaguing cities and towns across the country.
Two panels of policy experts, local politicians and state officials analyzed the origins and repercussions of this widespread issue Thursday night during the Taubman Center for Public Policy and American Institutions’ annual Anton/Lippitt Conference on Urban Affairs entitled “Pensions in Peril: How Municipalities are Defusing this Fiscal Time Bomb.”
“This is an issue that not only confronts us here in Rhode Island, but the whole nation,” said Marion Orr, director of the Taubman Center. The center was drawn to the topic when they saw “calls from around the country for pension reform,” and the local controversy that arose when the state legislature passed pension reform last November, he said. The state legislation was unpopular among active workers and retirees due to restrictive provisions to the state pension plan, which they argued breached earlier promises.
Robert Clark, a professor from North Carolina State University, began the dialogue by presenting a short history of the development of public sector pension plans. Clark traced their origin back to disability plans first utilized by national militaries in the 19th century.
Clark pointed to multiple problems with the funding of current systems – such as low retirement eligibility rates and lack of regular pension contributions – and suggested changes need to be made to current regulations in order to create a more sustainable system.
Joshua Rauh, a professor of finance at the Stanford Graduate School of Business, followed Clark with a presentation on his research that exposes the hidden budget shortfalls with which most municipalities grapple. Rauh used quantitative examples to show that federal Governmental Accounting Standards Board regulations allow municipalities to incorporate expected returns on investments into budget calculations. This practice enables these cities and towns to operate on underfunded budgets, despite state laws requiring them to report and operate from annually balanced budgets. Because municipalities traditionally invest pension plans in stocks and bonds, the current economic recession has only exacerbated the deficits within these plans, he said.
“The real problem is that our pension promises are guarantees but the returns on these investments are not guaranteed,” Rauh said.
Eileen Norcross, senior research fellow at the Mercatus Center at George Mason University, rounded off the first panel by praising General Treasurer Gina Raimondo for working with policymakers to institute last year’s R.I. Retirement Security Act of 2011, the controversial plan that reduced the state unfunded pension liability by almost $3 billion. In this respect, Rhode Island stands as an example for other states, like Pennsylvania and California, which need to make even more drastic cuts, she said.
“Rhode Island got some principles right but when you look at the numbers, they need to go farther,” Norcross said.
The next panel discussed how the state and municipalities are working together to manage the pension problem.
Both Warwick Mayor Scott Avedisan and Pawtucket Mayor Donald Grebien said they were working with their respective city councils to resurrect critically underfunded pension plans within their municipalities. But they agreed that local politics was getting in the way of the larger reform they envision.
“It’s very difficult to get people to think about 10 years down the line when they have to worry about elections next year,” Avedisan said, referencing the difficulty of working alongside a city council that operates on short terms. “When you have a political process that doesn’t want to move, that doesn’t want to change, that’s one of the biggest problems you have.”
Gayle Corrigan, chief of staff to the Central Falls receiver, presented on the city’s bankruptcy, explaining the motivation behind drastic cuts made to retiree pension plans – cutting some benefits by over 50 percent. Bankruptcy, though largely viewed as a last-resort option for municipalities, has been utilized by at least 26 cities and towns across the country since 2010.
“Pensions were a big reason why Central Falls filed for bankruptcy,” Corrigan said. “We’ve heard a lot today about how pensions are a math problem, but I also want to point out that it’s also a cultural problem.”
Very early in the proceedings, the state realized that the pension system in Central Falls had been abused for years as workers opted to retire on disability plans instead of the standard option, because a larger portion of the disability plan was tax-exempt, Corrigan said. And while she said the workers should not be blamed for acting rationally and wanting to maximize their retirement benefits, decades of this type of practice take a huge toll on pension funding.
Educating active workers on the figures and feasibility of different plans was integral to redefining a more stable system, she said. And once workers understood fiscal constraints, Corrigan said, “they wanted to make sure they did everything so that (bankruptcy) would not happen again.”