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Public Pension Underfunding: Closing the Gaps Federal Reserve Bank of Cleveland. Rhode Island Retirement Security Act of 2011 Presentation by Richard A. Licht Rhode Island Director of Administration Friday, November 22, 2013. Who is Affected?. Rhode Island State Employees All RI teachers

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public pension underfunding closing the gaps federal reserve bank of cleveland
Public Pension Underfunding: Closing the GapsFederal Reserve Bank of Cleveland

Rhode Island Retirement Security Act of 2011

Presentation by

Richard A. Licht

Rhode Island Director of Administration

Friday, November 22, 2013

who is affected
Who is Affected?
  • Rhode Island State Employees
  • All RI teachers
    • 40% State
    • 60% Municipality
  • RI Municipal Employee Retirement System (MERS)
    • Optional
    • State Administered
    • 100% Local Contribution
    • Benefits set by statute not collective bargaining
    • Municipality must pay 100% of Annual Required Contribution (“ARC”)
not affected
Not Affected

Locally administered plans, “non-MERS”:

  • 36 plans
  • Benefits vary - collective bargaining
  • Mostly Police and Fire
  • No Requirement to make ARC payments
keys to success
Knowing the facts

Leadership

Willingness to compromise

Comprehensive one-time reform

Sharing the sacrifice

Retirees

Existing Employees

Taxpayers

Collaboration

Governor

Treasurer

Speaker of the House

Senate President

Keys to Success
knowing the facts
Knowing the Facts

1999

  • Funding status - 82%
  • Reamortized to 30 years - never missed a payment

2010

  • Funding status - 58.5%
  • Unfunded liability - $4.7 billion

May 2011: Changed assumptions

  • Investment return: 8.25% to 7.5%
  • Modernized mortality rates
knowing the facts1
Knowing the Facts

Consequences of changed assumptions:

  • Funding status: 48%
  • Unfunded liability: $6.9 billion

Actuarial costs and contribution rates:

  • Normal cost: 11.4% State employees, 11.8% teachers
  • Employee contribution rate: 8.75% State employees, 9.5% teachers
  • Employer contribution rate: 23%
fy 2002 pension costs
FY 2002 Pension Costs

Employer Contribution

  • $139 Million
  • 5.6% of Payroll
  • 3% of State Tax Revenue
the solution retiree sacrifice
The Solution- Retiree Sacrifice

COLAs

  • Retirees retain pre-reform COLA increases
  • Future COLAs dependent on investment return
  • Applies only to first $25,000 (indexed)
  • Suspended until solvency achieved (80% funding)
  • Calculated as 5 year smoothed investment return less 5.50%, with 0% Floor and 4.0% Cap
  • COLA delayed until later of SSNRA or 3 years after retirement
  • Interim COLA once every five years
the solution active employee sacrifice
The Solution- Active Employee Sacrifice

Retirement Age

  • Non-vested: Social Security Normal Retirement Age (SSNRA) but not greater than 67
  • Vested not eligible to retire: proportional to SSNRA but minimum 59-option to keep current retirement age
  • Eligible to retire: no change
the solution active employee sacrifice1
The Solution- Active Employee Sacrifice

Hybrid Plan

Defined Benefit

  • Retain all accrual to June 30, 2012
  • 1% accrual per year after July 1, 2012
  • Employee contribution rate 3.75%
  • Vesting reduced from 10 to 5 years

Defined Contribution

  • Mandatory
  • 5% Employee contribution
  • 1% Employer contribution
  • Vesting after 3 years
  • Non-Social Security Communities: Additional contribution
    • Teachers: 2% Employee, 2% Employer
    • Police: 3% and Fire: 3%
the solution active employee sacrifice2
The Solution- Active Employee Sacrifice

MERS Police and Fire

  • Minimum retirement age 55 with up to 25 years of service
  • Transition rule: if 45 and 10 years, then 52
  • 2% accrual rate

State Police

  • Reduces accrual rate to 2%
  • Reduces CLA
  • Five year average compensation

Judges

  • Increase contribution rate to 12%
  • Reduces COLA
the solution taxpayer sacrifice
The Solution- Taxpayer Sacrifice

Reamortization

  • Increased from 19 years to 25 years
legal challenge
Legal Challenge
  • Is Statute a contract?
  • Is impairment substantial?
  • Is there a valid public purpose?
  • Now in Mediation – Court-Ordered Gag Order
state employee retiree health opeb
State Employee Retiree Health (“OPEB”)

State Employees Unfunded OPEB Liability:  $775 million

Created OPEB Trust in 2011.  Funded ratio at 1%. Amortized over 25 years.

FY2014 State Employee ARC:   7.84% of payroll

unfinished business
Unfinished Business

Locally-Administered Business (36 Plans)

  • $2.1 billion unfunded liability
  • Based on aggressive assumptions
  • Collective funded ratio 40%
    • 24 less than 60%
    • 9 less than 30%
    • 18 are not meeting ARC payment
  • Locally-Administered Pension Plans Study Commission
locally administered pension plans study commission
Locally-Administered Pension Plans Study Commission
  • Municipalities with plans in Critical Status (below 60% funded) required to notify participants / beneficiaries of the plan, General Assembly, Department of Revenue, Auditor General of the critical status no later than 30 business days following the certification
  • Required to submit a reasonable alternative funding improvement plan to emerge from critical status
  • Provides recommendations on OPEB; does not address local pension plans in the state system (MERS)
  • Developed funding improvement guidelines
what happens when you do not reform central falls a case study
What Happens When You Do Not Reform: Central Falls – A Case Study
  • City faced major fiscal issues, including a $6 million operating deficit and $79 million in pension and health care obligations
  • Stave appointed receiver who subsequently filed a petition under Chapter 9 Federal Bankruptcy in August 2011
  • Pensions were reduced up to 55%
  • Emerged from bankruptcy in Fall 2012, with court-ordered balanced budgets for FY 13-17