EXCLUSIVE: COLAs Killing State Pension System
Thursday, October 13, 2011
The state pension system shelled out nearly two hundred million dollars in annual cost of living adjustments in 2010—an expense that experts say is driving the cost of the system out of control and pushing the state deeper into debt.
In all, the total tab for COLAs payments issued to roughly 26,600 retired state workers, municipal employees, teachers, and other retirees cost the state at least $174.6 million in 2010, based on a GoLocalProv review of pension payroll data.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“That’s the beast—that’s the problem,” said William O’Gara, former legal counsel to the state retirement system and an attorney with Pannone Lopes Devereaux & West.
COLAs accounted for a fifth of the overall cost of the pension payroll in 2010, which was more than $830 million. And the total cost of COLAs equaled more than half the amount taxpayers contributed to the system that year—$303 million.
“It is obscene for this state to be paying out COLAs annually that are approaching 200 million a year, on top of the pension benefit itself,” said Harriet Lloyd, executive director of the Rhode Island Statewide Coalition. “There is no way the Treasurer, the Governor, and the Legislature can walk away from the coming pension reform process and believe they have achieved anything meaningful for this state if they leave the COLA tab standing, and that includes for vested and retired workers.”
■ Teacher at the Top: The single largest COLA payment was made to a Providence teacher who retired in 1987. That teacher pulled in a modest $23,109 in terms of his base pension income. But his COLA added $74,655 to that.
■ The Biggest COLAs: Most of the largest COLAs went to retired state troopers and judges who never contributed to their pensions. Of those, 25 received COLAs worth $36,000 annually—$5,000 more than the total amount an average state retiree earns.
“A system which has allowed retired judges who never paid into the pension fund to receive monthly COLAs of over $4,000 per month on top of a six or seven-thousand a month base benefit represents a corrupted and broken system,” Lloyd told GoLocalProv. “That is part of the reason the COLA has to be immediately frozen if any integrity is to be returned to the system. The taxpayers and the active workers themselves deserve to see this happen.”
■ COLAs Larger than Pensions: A number of troopers and judges are receiving more from their COLA than their base pension. For example, one trooper who retired in 1970 had a base pension of $15,349 last year but he earned $39,209 in addition to that thanks to his COLA.
■ Retired Lawmakers Benefit: For the nearly 230 retired state reps and senators who have legislative pensions, about half of them receive COLAs that are at least double what their base pension is.
COLAs ‘drive the system off a cliff’
O’Gara says the 3 percent compounding COLAs that most state retirees currently receive is “what drives the system off a cliff.”
One measure of how much costs are increasing is the annual amount taxpayers have to contribute to the system. That contribution doubled from $139 million in 2003 to $303 million in 2010. It will double again to $615 million by 2013. Soon after that it will balloon to more than $1 billion a year.
“That is a staggering amount of money,” said Sen. James Sheehan, D-North Kingstown. “It just boggles my mind how we would balance the budget with that kind of an expense on the books.”
COLAs also are one of the reasons the state has such a large unfunded liability, O’Gara said. That liability stands at approximately $7 billion, according to General Treasurer Gina Raimondo’s office. Suspending or freezing COLAs for all active and retired members of the pension system until the system is 80 percent funded would cut the unfunded liability by $1 billion, according to a report her office issued earlier this year.
The difference between a compounding and a simple COLA is demonstrated in the pension fund the state manages for cities and towns, MERS, according to O'Gara. Unlike other state retirees, many of those in MERS do not receive any COLA while those that do receive a simple cost-of-living adjustment, instead of one that is compounded. He says that is why it was 92.8 percent funded as of June 2009 while the state funds for teachers and state employees are 61 percent and 62.3 percent funded, respectively.
A dissenting view: COLAs not a problem
But not everyone thinks compounded COLAs are a problem.
“COLAs are meant to protect the value of a pension from inflation. In order to do that, they have to compound at a rate comparable to inflation,” said Tom Sgouros, a former Democratic candidate for General Treasurer and a GoLocalProv MINDSETTER™.
He noted that many of the largest COLAs that “sound outrageous” make sense given how long some individuals have been retired.
“Prices are now about 65 percent above where they were 20 years ago, so someone who retired in 1991 and now has a COLA at about 65 percent of their base pension [is] right in line,” Sgouros said. “The important thing is that these are expenses the actuaries took into account when they designed the plans and are no more of a problem than the base pensions themselves.”
He added: “Where the system has problems, it’s with expenses the actuaries didn't foresee. Legislators who didn’t pay into the system are one example, and COLAs that significantly outpace inflation are another. A COLA is meant to protect the value of a pension—it should not be a way to increase its value after retirement.”
COLAs likely to be part of reform proposal
Changes to COLAs are expected to be included the pension reform proposal Raimondo and Governor Lincoln Chafee submit to the General Assembly as early as next week.
“It is my sense that there will be a modification of the COLA,” Sheehan told GoLocalProv.
He said that could happen in one of two ways: either as an outright freeze on all COLAs for current retirees or by reducing the COLA to 3 percent on the first $35,000 of pension income—and basing that on the Consumer Price Index, a measure of inflation.
A freeze, he said, would have a disproportionate impact on retirees who might make as little as $25,000 a year. “That would hurt them a lot more … than a judge who might be in excess of $100,000 a year,” Sheehan said. But he said he will not come out in favor of one scenario over another until he sees the final estimates for how much each will yield in savings.
Whatever the General Assembly passes during its special session this fall, Sheehan expects that it will be challenged in court. It might be easier to change the COLA without touching the base pension, according to Sheehan. “I think that one is probably the most susceptible to interpretation … most vulnerable perhaps to change for current retirees,” Sheehan said.
But one critic of COLAs disagrees. Rep Rene Menard, D-Manville, has filed legislation to end COLAs for future hires—and says he will do so again in the next session. But he doesn’t think the same can be done to current retirees and employees already vested in the system. “I’m not sure that legally it would stand the challenge,” Menard said.
Rep Brian Newberry, the House Minority Leader, also is holding off on endorsing on specific changes to COLAs. “By any means of how you look at it, the pension system is going bankrupt and we have to do something about,” Newberry said. “At this point, I don’t rule anything out.”
Union leader defends benefit
J. Michael Downey, the president of AFSCME Council 94, said his union opposes any freeze on COLAs for retirees. He said state employees contribute to their pensions at one of the highest rates of any in the country. He said that higher contribution rate was agreed to with the understanding that it would cover the cost of a COLA.
Moreover, he said COLAs were promised to state employees—such as himself—who agreed to work for lower salaries in exchange for the benefit. “If they want to go taking away COLAs from people, I guess they could take away COLAs from people who did not contribute to the system,” Downey said.
He says the high COLAs some retirees earn do not reflect the situation for the vast majority of state retirees. He said those at the bottom of the scale—such as cook’s helpers, housekeepers, electricians, and plumbers—count on their COLA to get by in retirement. For example, one retired state worker near the bottom of the scale has an annual base pension of $24,237. The COLA adds just $1,476 to that each year.
“If you don’t have a COLA, I don’t think you’re going to have a decent retirement with much dignity,” Downey said.
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