NEW: Report Finds Municipal Pensions Struggling
Wednesday, September 21, 2011
A new report released today by the General Assembly’s Joint Committee on Legislative Services finds that the fiscal health of pension plans administered by Rhode Island municipalities has declined further compared to an earlier report in March 2010.
The report was prepared by Acting Auditor General Dennis E. Hoyle and resulted from a review performed by the Office of the Auditor General of the various locally-administered pension and OPEB plans covering Rhode Island municipal employees.
Due to economic conditions and reductions in State aid, municipalities are even further stressed to make annual required contributions and funded ratios have continued to decline; thereby leaving some of these plans in perilous condition. The collective unfunded liability for locally administered pension plans has increased $200 million from amounts reported in our March 2010 report to $2.1 billion.
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At $3.5 billion, the unfunded liability for other postemployment benefits provided by municipalities (“OPEB”– generally retiree healthcare) overshadows the collective unfunded liability for all locally administered pension plans. According to the report, locally-administered OPEB plans are less than 1% funded – only $27.5 million has been set aside to pay future retiree health benefits.
Additionally, the number of pension plans considered at risk increased to 24 out of 36 plans. Of the 24 locally-administered pension plans considered at risk: two Central Falls plans are nearly insolvent and cannot meet future benefits and the municipality is in bankruptcy; twelve are significantly underfunded and annual contributions are significantly less than actuarially determined amounts; six other plans are still significantly underfunded although annual contributions are more than 80% of annual required amounts; and four additional plans, despite a funded ratio greater than 60%, were considered at risk because annual contributions were generally declining over a multi-year period.
Recommendations
The auditors offered the following recommendations for both municipalities and the State to ultimately decrease the risk that these plans (1) will be unable to meet their benefit obligations to retirees, or (2) continue to negatively impact a community’s overall fiscal health.
Municipal Level:
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Commit to making incremental progress towards funding 100% of the annual required contribution for pensions and then fund the plans consistently at required levels.
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Reexamine benefit provisions within the locally-administered pension plans and embark on reforming those benefits where warranted; mirror pension reform measures contemplated or enacted by the State for its employees and local teachers; and consider other retirement plan options for new hires (e.g., “hybrid” or defined contribution plans).
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Complete a comprehensive analysis of retiree health benefits offered to retirees to (1) review the affordability of the benefits offered, and (2) ensure the assumptions underlying the valuation of future liabilities are appropriate and reasonable. Contemplate mirroring retiree healthcare reform measures adopted by the State for its retirees, and commit to funding OPEB benefits in an actuarially sound manner.
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Seek to remove pension and retiree healthcare benefit plan provisions from collective bargaining agreements and address through local ordinances or charter provisions.
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Merge plans into the Municipal Employees’ Retirement System (MERS).
- Create trusts for OPEB benefit plans and begin, or continue, funding future benefits at actuarially determined levels.
State level:
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Consider legislation that would provide flexibility and eliminate the obstacles that currently make merging locally administered plans into MERS unlikely and problematic. These include providing a time frame (e.g., no more than 5 years) to achieve 100% funding of the ARC and allowing flexibility for nonconforming benefit structures for plans merging into the state-administered Municipal Employees’ Retirement System.
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Consider legislation that would require locally-administered plans with funded ratios below a specified threshold to be merged into the state-administered Municipal Employees’ Retirement System.
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Explore state legislation that would remove pension and retiree health benefits from municipal collective bargaining agreements.
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Explore options for pooled investments (for locally-administered pension and OPEB plans) to enhance investment performance, reduce costs, and reduce investment risk.
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Revise the benefit structure within the Municipal Employees’ Retirement System to mirror changes contemplated or enacted for state employees and teachers within the Employees’ Retirement System.
- Implement a state-administered agent multiple-employer OPEB plan for all municipalities with a common benefit structure and a common health insurance provider/administrator – mirror OPEB benefit restructuring adopted for State employees.
