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Donna Perry: The Taxpayers’ Pension Tab and the Union Lawsuit

Thursday, June 28, 2012

 

The state’s nationally heralded pension system reform law officially kicks into effect just days from now. Rhode Island’s outdated and unaffordable direct benefit system is officially set to transition to a hybrid 401 (k) contribution-benefit system on July 1. But the new law, viewed as one of the few fiscally smart achievements made by Rhode Island in quite some time, now faces a comprehensive legal challenge as multiple state unions, as expected, went to court late last week to file a collective lawsuit.

The suit covers familiar terrain as it seems to center its arguments on clauses of the RI Constitution, alleging the breaking of a contract, the taking of property, and a violation of workers due process. But curiously, the suit also appears to be raising a new challenge to the state’s portrayal of a fiscally troubled pension system in the first place that drove the nearly yearlong overhaul process headed by Treasurer Gina Raimondo. It’s reported that the suit characterizes the Municipal Employees Retirement System (MERS) as a “well-funded” system which was 88% funded as of 2009.

But the problem with that line of debate is that it was well known the plan, like many public retirement plans, was relying on completely unrealistic investment return assumptions which were masking the true picture of the liabilities. Speaking of assumption rates, the state’s defense of the new law may have just received a new round of ammunition in the form of new nationwide accounting rules which govern public pension plans. The Government Accounting Standards Board (GASB) this week approved rules, which go into effect next January, which will tighten up how states evaluate pension liabilities and that will urge placing lower assumption rates on troubled state and municipal plans in order to give better transparency to the true liability picture.

Across the country there is growing momentum to not only mandate more realistic, lower assumption rates, but also to force a transparent process to reveal the true taxpayer obligation connected to the plans. In other words, projecting the taxpayers’ pension tab, and revealing how it will grow year to year, has now been recognized as an integral piece of state and local government assessments oftheir pension systems.

As Judge Sarah Taft-Carter of the state’s Superior Court hears arguments in coming weeks, and the unions emphasize the contribution to the retirement system made by the employees themselves, the taxpayers’ contribution has to be equally considered. Striking a greater equitable balance between the two was in fact among the myriad of changes the new law hasachieved. Treasurer Raimondo demonstrated that retirees had not in fact been paying what would amount to their fair share into the system for their own retirement, when balanced against what the taxpayer contributes over the long haul.

A long list of factors, including RI’s early retirement ages, formulas used to calculate the benefit itself among them, helped to create this imbalance. Raimondo’s final report, which set out the roadmap for the massive legislation which became law, was the result of nearly a year of system analysis, actuarial assessments and the deliberations of a joint union reps/elected official advisory panel. That’s why another union argument, that they deserved to “be at the table” when the system’s overhaul was being crafted, is completely disingenuous!!

Bob Walsh, Phil Keefe, Michael Downey and John Maguire, four union leadership heavy hitters, certainly had “seats at the table” as they made up a third of the entire panel. How can they now claim they were not part of the process? Furthermore, citing the Providence retirement agreementas an example of a more inclusive negotiated pension overhaulmay fall short as many observers believe the capital city’s agreement may ultimately prove to be inadequate in reversing the city’s pension obligation debt.Providence aside, the ailing condition of the state’sother communities and the taxpayers they represent, must be considered by the Judge.

The Court can’t overlook the fact that Woonsocket joined the list in recent weeks of the communities under some form of state oversight due to overwhelming financial pressure, and consider what could happen to these communities if the combined $100 million in annual pension contribution payments, which the law helped avoid, was now suddenly expected of cities and towns. During the deliberations last year, Raimondo and legislative leaders, including Finance Committee chairs and Speaker Fox, repeatedly cited that the need for the overhaul was all about the math. It can only be hoped that the Court will realize that the wholesale calamity of repercussions that would occur should the law be thrown out, makes for an equation that just can’t add up for Rhode Island.

Donna Perry is Executive Director of RISC, RI Statewide Coalition - http://www.statewidecoalition.com

 


 

 

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