The editors at Bloomberg View resurrected Gina Raimondo’s so-called pension reforms today

September 10, 2014

“…As state treasurer, Raimondo pushed through the boldest pension reform in the country several years ago. With the U.S. facing more than $1 trillion in unfunded pension liabilities, her victory provides a few valuable lessons for her fellow public officials -- 

Democrats especially.

“Lesson No. 1: When pension costs threaten the public’s finances, Democratic voters are amenable to changes. Raimondo’s reforms -- supported by Democrats in the state legislature -- trimmed pension benefits for both retirees and current workers, raised the retirement age to 67 from 62, suspended most cost-of-living increases until the system was restored to health, and instituted 401(k)-style benefit plans...

“Lesson No. 2: Not all unions oppose making pension plans more solvent. In Rhode Island, public-employee unions lined up against Raimondo, but private-sector unions strongly supported her -- similar to the experience faced by New York’s Democratic governor, Andrew Cuomo, who defeated a more liberal challenger in Tuesday’s primary.

“Lesson No. 3: Give people the data. Raimondo won praise for putting out a clear-eyed report that helped put the focus of the debate on the state’s finances, not on the state's employees. Voters understood the bottom line -- the state’s pension system was not sustainable -- and rewarded Raimondo for having the courage to do something about it.

“Lesson No. 4: Don’t make it personal. Past politicians, not current workers, are to blame for offering benefits that proved unaffordable. Voters rightly support and respect teachers, police officers, firefighters, social workers and others who have chosen to make a career of public service.

“Of course, all pension battles inevitably end up in court. Unions have sued to stop Rhode Island’s pension reform, as they have in Illinois, and many states have laws or court rulings that limit state and local governments from reducing benefits for current retirees and current workers. Unless that changes, governments that want to control labor costs will have to cut more into retirement benefits for future workers -- or reduce public services.

“Raimondo’s victory is unlikely to lead to a wave of Democrats agitating for pension reform. But it may give some a little more courage --along with some useful pointers on how to do it successfully. Democratic governors in California, Illinois and New York who signed bills trimming pension benefits have won re-nomination this year -- demonstrating that elected officials can support pension reform and live to tell the tale.”

The above article is an editorial from Bloomberg View.

Commentary: 

Before becoming the controversial General Treasurer of Rhode Island, Gino Raimondo ran a venture-capital firm in Providence, Rhode Island.  Raimondo’s remedies for her state pensions were echoed at the “Fixing Illinois’ Public Pensions” forum in Chicago on April 9, 2012, by two of the four panelists.  A few of Raimondo’s assertions that are widely publicized in her online interviews were paraphrased– “the way to solve fiscal problems is to leave politics aside; we must focus on the math of the problem; truth is in the numbers; the passage of pension reform is a great step forward as we continue to work to put our state on a secure path toward growth and prosperity.” 

Raimondo’s solutions for Rhode Island’s shortfall of $7 billion can be summed up rather simply, however: suspend the cost-of-living increases and offer the state’s public employees a 401 (k) savings plan; raise the minimum retirement age (for full benefits) to 67 years old; increase public employee contributions, and press for a cut in the assured return on pension investments. 

The latter opened an even wider deficit if benefits shrink or payments into the fund do not rise because of a 7.5 percent anticipated return instead of an 8.5 percent return.  According to Steve Stanek of The Heartland Institute, this is essentially a re-amortization of the “pension system debt to lower and to smooth future payments.”

The State of Rhode Island does not provide accrued benefits or contract rights’ protection either by constitutional provision or statute as in Illinois.  Governor Lincoln Chafee of Rhode Island said after signing pension reform into law: “I take no joy in the pain this will cause for thousands of Rhode Islanders.”  Really?

As stated by the Mercatus Center at George Mason University, “the Rhode Island Retirement Security Act of 2011, proposed by Governor Chafee in October 2011, contain[ed] two significant reforms of the state’s pension systems –the creation of a hybrid pension plan and the suspension of the Cost-of-Living Adjustment (COLA) contribution—which would have the effect of reducing the state’s unfunded liability…”  Thus, COLA payments have been suspended “until the system reaches 80 percent funding.” 

“State workers enrolled in the current state pension systems [have now] shifted to a combined defined benefit/defined contribution plan integrated with Social Security. State workers and teachers [are] required to contribute 8.75 percent of their paychecks toward retirement. The contribution [also] represents a decrease for teachers who had currently contributed 9.5 percent. Of the 8.75 percent contribution, 3.75 percent [is] put toward the defined benefit pension, which vests after five years of service (lowered from the current vesting period of 10 years). The remaining five percent of the employees’ contributions [are] invested in the retirees’ personal accounts. The employer [matches] this contribution with an additional one percent” (Mercatus Center). In Illinois, every one percent increase in membership contribution equals $100 million.

According to a slide presentation entitled, “Pension Reform Legal Principles and Considerations” from the Office of the General Treasurer in Rhode Island (April 10, 2012), the Federal Statutory Law, ERISA, 29 USC 1054 (g) (1) claimed that “the accrued benefit of a participant under a plan may not be decreased by an amendment of the plan…”  The presentation revealed that out of the 50 states, 10 states have constitutional provisions that specifically protect public pension benefits. They include Michigan, Texas, Louisiana, Arkansas, Hawaii, New Mexico, Arizona, New York, California, and Illinois. The last four states listed here “provide contract rights to benefits in place on the day of hire.”

As divulged in the Pension Reform Legal Principles’ and Considerations’ explanations: “For a statute to constitute a contract for purposes of the Contract Clause, there must be a clear and unequivocal indication that the legislature intended to create contractual rights. The principal function of a legislature is not to make contracts but to make laws establishing the policy of the state that is inherently subject to revision and repeal.  The ‘unmistakability doctrine’ applies equally to state statutes and municipal ordinances.”

Rhode Island Is Not Illinois:

The State of Rhode Island does not provide accrued benefits or contract rights’ protection either by constitutional provision or statute as in Illinois. “The Pension Clause [Article XIII, Section 5 of the Illinois Constitution] not only makes a public employee’s participation in a pension system an enforceable contractual relationship, but also constitutionally protects the pension benefit rights contained in the Illinois Pension Code when an employee joins a pension system, including employee contribution rates. The Clause also safeguards pension benefit enhancements that are later added during employment. Further, the Clause ensures that pensions will be paid even if a pension system defaults or is on the verge of default. Finally, while the Clause bars the General Assembly from adversely changing the benefit rights of current employees via unilateral action, these rights are “contractual” in nature and may be modified through contractual principles. In sum, while welching on public pension promises is not an option for Illinois as some legal and civic commentators have suggested, legitimate contract principles provide a solution to mitigate this crisis” (Eric M. Madiar, Chief Legal Counsel to Illinois Senate President John J. Cullerton and Parliamentarian of the Illinois Senate).

Many Illinois citizens are aware that for decades the past state’s governors and legislators have not fully funded the public pension systems; that instead of paying into the pension systems, they have used that money to pay for other services without restructuring revenue sources. Hence, without having to pay for services, state legislators have created an enormous pension debt or unfunded liability for the public pension systems in Illinois. It is important to note that in Rhode Island, the state made all of its payments to the pension systems. Public employees in Illinois have been the victims of corruption, incompetence and irresponsibility for nearly 60 years.

The Illinois “Pension Ramp” (Public Act 88-0593), or the repayment schedule of 1995, has also greatly increased the total pension debt or unfunded liability and needs to be re-amortized, though legislators continue to ignore this most significant issue. “If retirement benefits and salary increases were the only drivers of the unfunded liability, the state retirement systems would be about 94 percent funded today [because public employees’ benefits are not overly generous]” (Ralph Martire, Center for Tax and Budget Accountability). Approximately one-third of the total pension payment each year is for “normal costs” to the system; the other two-thirds of the payment is the interest owed on the debt the state incurred for not fully funding the pension systems.

Illinois state legislators continue to ignore the essential fact that current revenue growth does not match the state’s need for public services and for payment of debts. In other words, the State of Illinois uses a “flat, low-rate income tax that does not adequately capture income growth, and income tax revenues thus routinely lag behind economic growth. The state relies heavily on a state and local sales tax that is almost exclusively applied to goods and excludes almost all services. Rhode Island does not have an antiquated flat-rate tax system like Illinois.

“Because Illinois is chronically short of the revenues it needs to cover its expenses, it has engaged in a number of poor fiscal practices over the years. Unlike Rhode Island, Illinois has postponed payments to vendors, failed to make adequate pension contributions or borrowed money to make the contributions, securitized or sold assets, and taken other dubious actions” (the Center on Budget and Policy Priorities).

Cutting pension benefits for public employees, through so-called “pension reform,” will not solve the state’s budget deficits in Illinois. Creating and passing any bill that diminishes “promised” benefits, such as the compounded cost-of-living adjustment that is already in place for retired and current teachers, is a breach of contract and trust. It’s a discriminating and unjust forfeiture and theft of one particular group of people in Illinois, and it’s wrong.

Though the State of Illinois has a serious pension debt and revenue problem that must be rectified, legal and moral sense dictates that the Illinois General Assembly must align with the U.S. and State Constitutions and sanction the vested rights of its middle-class public employees.

A final note: the state’s constitutional provision, Article XIII Section 5, protects current employees and retirees. So-called “pension reform” is an attempt to break a constitutional contract. It is a matter of moral and legal concern for every citizen of Illinois to pay attention to any proposed violations of rights and benefits (that are earned, deferred compensations) of the state’s 693,000 public employees. It should be of vital concern for all citizens that the government of Illinois would want to prove its contracts are worthless, especially when the “most basic purposes of the impairment [of the contract] clause [Article XIII, Section 5] as well as notions of fairness that transcend the clause itself, point to a simple constitutional principle: government must keep its word” (Laurence H. Tribe, American Constitutional Law).

To read Forbes' “Rhode Island Public Pension Reform: Wall Street's License to Steal” by Edward ‘Ted’ Siedle, Click Here.