Pension Wars 2011: How Other States Are Solving The Problem
Saturday, September 17, 2011
Everyone knows Rhode Island’s pension is a mess, but how does it stack up against other states pension systems? Rhode Islanders can take solace in the fact that they’re not the only ones struggling with ballooning pension costs—according to a study by the Pew Research center 31 states have pensions that are less than 80% funded, which is the common benchmark for a “healthy” pension.
With 59 percent funding, Rhode Island’s pension is the sixth worst in the country. The only worse performing states were New Hampshire and Kentucky with 58 percent each, then Oklahoma (57 percent) and West Virginia (56 percent).
New York topped the list with a remarkable 101 percent funded pension. Close behind were Washington, North Carolina, and Delaware—all of which had pensions with over 94 percent funding.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAs large-scale pension reform looms on the horizon, Rhode Island would be wise to look to some of its fellow states and see what has and hasn’t been working for them. The following states’ experiences with pension reform should especially informative to Rhode Island legislators hoping to make wise and lasting decisions this Fall.
New Hampshire—ongoing reforms
It may be first in the primaries, but the Granite State is dead last when it comes maintaining a well-funded pension. Earlier this summer, a pension reform law went into affect that increased employee contributions between 2 and 2.5 percent and increased retirement ages.
A coalition of public unions attempted to challenge the legality of the reform, but they were ultimately unsuccessful. Given Justice Taft-Carter’s recent ruling in favor of employees’ legal right to their pensions, Rhode Island could be in for the legal battle that New Hampshire seems to have narrowly avoided.
If that doesn’t sound familiar, this next part will: New Hampshire has recently commissioned a six-member panel of legislators that will meet weekly for seven weeks to discuss the issue of further pension reform. Last June, Treasurer Gina Raimondo and Governor Lincoln Chafee took similar measures when they commissioned a 12-member pension advisory group.
New Hampshire’s experience with taxpayer reaction to pension reforms could be informative to Rhode Island lawmakers trying to find that line between fiscal pragmatism and social obligation.
Alaska—drastic changes
Apparently, pensions don’t do well in the cold. Alaska has one of the country's worst funded pensions at only 61%. Despite these low numbers, however, Alaska has been one of the most proactive and innovative states in addressing their unfunded pension.
Back in 2010, Alaska, like Rhode Island, was estimating an 8.25 percent return rate on their pension investments. As both states have gotten more serious about reform though, they have lowered these estimates to more accurately reflect the new state of the market. Alaska dropped back to 8%, whereas Rhode Island lowered its all the way to 7.5 percent. Both changes further widen the funding gap, but they also reflect a necessary first step towards more serious reform.
Reform minded Rhode Islanders should pay special attention to Alaska’s 2005 pension system overhaul, which converted the defined benefit system into a 401(k) styled contribution system. Now, newly hired public employees have an individual account into which they and the state make a joint monthly contribution.
Currently, Rhode Island uses a defined benefit system in which benefits are determined in advance by a preset formula and must be administered regardless of investment returns. Many have advocated that Rhode Island should change over to a defined contribution system—like that adopted by Alaska. This type of pension system is the preferred one in the private sector, and Treasurer Raimondo has already implied that her new proposal will incorporate elements of defined contribution plans.
Connecticut—a parallel image
Our neighbor to the west, Connecticut’s pension is only slightly more funded than Rhode Island’s—a measly 62 percent. Connecticut, like New Hampshire and Rhode Island, set up a commission to assess the problem, and its recommendations bear a striking resemblance to many of those currently being tossed around by Rhode Island’s pension advisory committee.
Among those recommendations were an increase in employee contributions, a lowering of the assumed rate of return from 8.25 percent, an increase in the retirement age, and an integration of elements from a defined contribution style plan.
So far, Connecticut’s approach to its pension problem has borne a remarkable parallel to Rhode Island’s, and legislators would be wise to examine what’s happening in Connecticut before they begin making definitive statements about reform back home.
Maryland—mild reforms
Maryland’s state pension is significantly better funded than Rhode Island’s, but at only 65 percent it’s still far below the national average. Last April, however, Maryland legislators engaged the issue and managed to pass significant pension reforms.
Their reforms included increasing employee contributions from 5 to 7 percent; and capping COLA increases at 1 percent in years when investment returns are low and at 2.5 percent when they are high. Unlike Alaska, Maryland opted against a more drastic overhaul that would have converted the pension system into a 401(k) style defined-contribution system.
The Best Funded Pensions
While Rhode Island can certainly benefit from examining the pension predicaments in other states, it can learn even more by looking at the states with high performing pensions. With reform seeming inevitable, the state should be sure to look at pension system that have proven to be both fair and sustainable.
New York boasts the best-funded pension in the country—currently maintaining a very impressive 101%. Despite this high-level of funding, many are concerned that the defined-benefit system currently in place in New York will eventually prove unsustainable if not reformed promptly.
The only other state with a 100% funded pension may be the last one you’d expect: Wisconsin. Despite all the controversy and turmoil surrounding Governor Scott Walker’s proposal to cut workers’ collective bargaining rights earlier this year, Wisconsin has the nation’s second best funded pension.
The exceptional health of Wisconsin’s pension may be due in part to a built-in dividend feature that pays out more when the pension has high returns and less when it takes losses.
When asked about the General Assembly’s awareness of other states’ pension issues, house spokesman Larry Berman said:
“Best practices and the experiences of other states are part of what the General Assembly is looking at… However, at this point, there is no single example or model that the General Assembly is pointing to. Although pension funding levels are a common problem among many states, each state has a unique set of circumstances that will shape its response.”
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