State and municipal employees will see dramatic changes to their pensions in 2012 if the General Assembly adopts a proposal outlined in a joint address Tuesday.
The Rhode Island Retirement Security Act, proposed by Gov. Lincoln Chafee '75 P'14 and General Treasurer Gina Raimondo, would impose a system-wide freeze on cost-of-living adjustments for all public employees and change the state-run system to a new hybrid pension plan.
If enacted, the bill would ensure that pension system shortfalls "never again spike to an unaffordable level," Raimondo said. The bill would immediately reduce the state's unfunded liability by $3 billion and increase the percentage of the state's pension obligations that are funded from 48 to 60 percent.
Cost-of-living adjustments would be restored for all public employees once the system is 80 percent funded, the minimum funding level for a healthy pension system. If the system drops below 80 percent funded, the adjustments would again be frozen.
Cost-of-living adjustments will not continue to exist in their current form if the bill passes. Instead, they will be tied to the state pension system's yearly investment returns. State pension recipients could receive up to a 4 percent cost-of-living increase on the first $35,000 of their pension depending on the returns — 1 percent more than the current maximum allowed increase. If returns dip below 5.5 percent, though, retirees will not receive cost-of-living adjustment payments.
Chafee compared the proposed hybrid plan with current federal employee pensions, which he said he supported when he was a U.S. senator. Hybrid plans combine a reduced defined contribution payment, a defined benefit account similar to a 401(k) and regular Social Security payments.
All state employees, teachers and municipal employees excluding police and fire departments will be enrolled in the plan. It would accommodate some teachers and local employees that cannot collect Social Security under the current system by requiring larger employer contributions.
Individual municipal pension systems are an "alarming aspect" of the state's problem, Chafee said. "We can't have true pension reform if these are ignored."
There are currently municipalities in Rhode Island with pension systems so underfunded they could require state intervention. "If you think Central Falls was an isolated case, reconsider," Chafee said.
Chafee and Raimondo clashed over the bill's treatment of locally administered plans, forcing negotiations between the two leaders Monday night. Raimondo expressed concern that collective-bargaining agreements could create legal barriers to implementing the bill and supported a more lenient treatment of local plans.
The Chafee-Raimondo bill would establish an independent review targeting municipalities with systems that are less than 60 percent funded, just below what the federal government identifies as "critical." Twenty communities in the state currently fit this description.
"We all know there are municipal pensions in crisis," Chafee said. "As captain of the ship, I clearly see these icebergs ahead."
