Reports say pension cuts could cost state more money

Two new reports from the progressive Economic Policy Institute will likely raise three important questions as the state meets in mediation with the labor unions over pension cuts: was the process fair, were RI retirement benefits out of line with other states and did the effort even save the state money?

“Hopefully will make any other state considering cutting their pension think twice,” tweeted anaylst/ author Robert Hiltonsmith today after EPI released his: Rhode Island’s New Hybrid Pension Plan Will Cost the State More While Reducing Retiree Benefits.

Hiltonsmith is a policy analyst for Demos (website / twitter handle).

In the report, he writes:

“Over time, RIRSA will likely lead to a gradual improvement in the Rhode Island pension funds’ funding ratio. However, this improvement can, on net, be entirely attributed to the increase in the retirement age and suspension and reduction of COLA benefits. The change in … plan actually increases costs to state and local governments and taxpayers while making retirement incomes less secure…

Further, the accounts’ exposure to market risk creates the possibility that many individuals’ retirement income will be significantly lower than average.”

In the other paper, Truth in Numbers? A Brief History of Cuts to the Employees’ Retirement System of Rhode Island, Monique Morrissey (site and if you find her on Twitter let me know and I’ll add it) similarly writes that the new “hybrid plan costs taxpayers more than the old system despite providing a less valuable and less secure benefit to workers.”

Both economic analysts also highlight fairness issues with regard to pension politics.

“The shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost,” Hiltonsmith writes.

He goes on:

The normal cost³ of providing benefits under the old ERSRI system was, on average, 11.4 percent of employees’ salaries (GRS 2011a), of which employees paid a flat rate of 8.75 percent and state and local governments together paid 2.64 percent. However, because of the large hole in the system’s finances, Rhode Island state and local governments combined contributed over $300 million in 2010 in total to the teachers’ and state employees’ pension funds, which is equal to 19.5 percent of employees’ total salaries that year.

Taken together, these findings suggest that the shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost.

And in her paper, Morrissey writes:

Rhode Island was slower than most other states to fund its pension system. As a result, the Employees’ Retirement System of Rhode Island (ERSRI) had a shortfall even at the peak of the dot-com bubble, despite providing relatively modest benefits. Indeed, workers—many not covered by Social Security—contributed more toward these benefits than their counterparts in other states.

Rhode Island was slower than most other states to fund its pension system. And though workers shouldered most of the cost of current benefits, employers failed to pay their full (smaller) share. As a result, ERSRI had a shortfall even at the peak of the dot-com bubble. Thus, despite a relatively low normal cost of benefits, the total employer contribution for ERSRI was nevertheless large because it had to cover a large unfunded liability. In 2005, the ERSRI funded ratio—the ratio of the actuarial value of assets to the actuarial accrued liability—was 56.3 percent for state employees and 55.4 percent for teachers (GRS 2006). This resulted in amortization rates—the amount (expressed as a share of current payroll) needed to gradually pay down the shortfall—of 19.3 percent for state employees and 20.4 percent for teachers (GRS 2006).

The challenge of paying off this legacy cost was complicated by demographic trends. Rhode Island was one of only two states (the other being Michigan) with stagnant or declining populations between 2000 and 2010 (author’s analysis of U.S. Census Bureau 2011). The public-sector workforce was also shrinking and aging, so there were fewer than 150 active public-sector workers per 100 public-sector retirees in 2005, compared with an average of around 270 workers per 100 retirees for plans in the Public Plans Database (author’s analysis of CRR and CSLGE 2005). Because the amortization rate is conventionally expressed as a share of current payroll, a shrinking workforce can lead to a higher amortization rate even if costs are not rising. This is misleading, because all else equal, a decline in current obligations makes paying down unfunded liabilities easier, not harder.