Frozen COLAs Will Cost Millions
Friday, October 21, 2011
A projected 19 year freeze of cost-of-living adjustments (COLAs) for the majority of pension recipients in Rhode Island would cost retirees millions of dollars and the unions plan to make the argument that the state’s economy will experience a severe downturn if the General Assembly passes the pension reform legislation introduced by General Treasurer Gina Raimondo and Governor Lincoln Chafee this week.
Under the Rhode Island Retirement Security Act of 2011, state employees and teachers would contribute 8.75 percent out of each pay check toward a hybrid system, the current amortization schedule would increase by six years and the retirement age would be raised.
But the most controversial portion of the bill has to do with the COLAs, which would be frozen until the pension system reaches 80 percent funding. For those eligible for a pension under $20,000, COLAs would return when the system reaches 70 percent funding. The best case scenario suggests COLAs would be suspended for at least a decade, by Raimondo said 19 years was a likely timeframe.
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If she gets her way, small businesses that rely on retirees will take an untold hit, some union leaders are saying. According to National Education Association Government Relations Director Pat Crowley, freezing COLAs as a way to stimulate the economy is a similar argument to the one made about giving tax cuts to the wealthy.
Crowley said that neither plan actually creates jobs and that freezing COLAs will only serve to destroy local businesses. The unions plan to make this case during the General Assembly’s special session, which begins committee meetings next week.
“This will be a major drain on the Rhode Island economy,” Crowley said. “This is the same argument we’ve been having for the last ten years. It’s a myth. It absolutely does not work. If it worked, the Carcieri plan would have worked. If it worked, the Bush plan would have worked.”
Time to Go Back To Fiscal Sanity
But Raimondo maintains that not passing the pension reform bill will crush the state’s economy because the system is unsustainable and allowing it to carry on in its current form will only cost taxpayers more down the line. She said the plan would also keep taxpayer contributions to the system at the same level for next year (almost $300 million) and save taxpayers nearly $3 billion over the next decade.
“The current underfunded system places the burden most heavily on the taxpayers and younger employees,” Raimondo said Tuesday. “The consequences of not passing this bold reform affect all of us, there will be significant tax increases, painful budget cuts, and a pension fund that could run out of money before many of today’s employees reach retirement.”
URI Economist Leonard Lardaro said the pension bill will help get the state back on track. He did, however, acknowledge that the unions aren’t wrong when they say small businesses could be affected by a freeze on COLAs.
“There will be some macro economic impact, that’s absolutely true. [Retirees] will get less so it will hurt spending. But the COLA thing is something we just have to do,” Lardaro said. “If we don’t do this, taxes will rise dramatically. We’ll have $330 million in new taxes and that would be enough to drive us into another recession. It’s time to end the lie and go back to fiscal sanity”
Business Community Supports Pension Reform
Despite the chance that a freeze on COLAs may reduce spending of retirees, the business community has come out in full support of Raimondo’s pension proposal. Jeanne Gattegno, President and CEO of West Bay Community Action Agency, said without reform, more jobs will be lost.
“The safety net West Bay provides is getting pulled and stretched beyond capacity,” she said. “In 2011, we served 10,700 families in Kent County. Of that number, 3,400 are homeowners – property taxpayers. If the pension debt reaches $600 million next year and continues to grow, how many other social services and jobs will be lost?”
According to John Gregory, President of the Northern Rhode Island Chamber of Commerce, the legislation will help businesses avoid paying more in taxes.
“Now is the time to pass comprehensive pension reform,” Gregory said. “Our businesses cannot afford additional tax increases. This legislation will provide needed relief for municipalities and taxpayers while providing fundamental system re-design. It is especially encouraging that re-amortization was not the first option, but rather a thoughtful component to the final package that puts our state on sound financial ground.”
Donald Wisehart of Financial Valuation Group of New England said the state can’t afford to use a “Band-Aid" approach to solving the pension system’s woes.
“As a tax and financial professional with decades of experience, I support the Treasurer’s pension reform plan 100 percent, and I believe that this reform should be immediate,” Wisehart said. “Rhode Island has inarguably run out of time. To continue the status quo or use some “Band-Aid” approach is no longer an option. Simply put, without the immediate implementation of this reform, our state will face financial calamity.”
Pension Money is Spent on Local Economy
Still, the unions say the business community is not looking out for small businesses that need retirees to spend money in their shops. According to a 2009 report by the National Institute on Retirement Security, “Benefits paid by state and local pension plans support a significant amount of economic activity in the state of Rhode Island. Pension benefits received by retirees are spent in the local community. This spending ripples through the economy, as one person’s spending becomes another person’s income, creating a multiplier effect.”
The study found that in 2006, the pension system helped support over 5,600 jobs and that "each dollar ‘invested’ by Rhode Island taxpayers in these [pension] plans supported $4.56 in total economic activity in the state.”
For Crowley and other union officials, that’s a message that isn’t getting across to Rhode Islanders right now. He said he understands the need for reform, but that Raimondo’s proposal is the right way to fix the system.
“Yes we need change, but the unintended consequences of money being taking out of the economy needs to be factored in,” Crowley said. “Retired people spend money. That pension money is spent on the local economy.”
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