Pension Reform

Ocean State Pensions Taking On Water

The Rhode Island state pension fund lost more than $460 million over the past fiscal year — the second negative annual return in as many years. This is an unfortunate turn of events for a state already in dire economic circumstances, with a track record of pension troubles. Despite having among the fewest public employees per capita of any state in the nation, the Ocean State can’t keep afloat.

Ironically, Governor Gina Raimondo was once a strong proponent of the kind of pension reform that has helped other states dig themselves out of major debt. She spearheaded an initiative that led to the Rhode Island Retirement Security Act of 2011. The plan aimed to reduce Rhode Island’s unfunded liabilities to 42 percent by limiting cost-of-living adjustments and moving many state employees away from a pure defined benefit plan to a hybrid defined benefit-defined contribution plan in which state employees contribute to their retirement savings.

According to research released in 2014 by State Budget Solutions, which is now a project of the ALEC Center for State Fiscal Reform, Rhode Island’s public pensions were merely 31 percent funded, with more than $16,000 in debt accrued on behalf of every resident. Though a much rosier picture is painted by the state’s annual reports, State Budget Solutions’ methodology eliminates certain accounting gimmicks perpetrated by government bodies, and instead applies a fair market valuation to pension fund assets, liabilities and anticipated future investment returns. When the newest version of the report is released later this year, Rhode Island will likely be shown to be in even worse shape than it was 2014.

Sadly, part of what might explain Rhode Island’s poor performance is that pension officials allowed politics to creep into the investment process, harming pensioners and taxpayers in the process. Rather than making sure promises to retired state workers were kept, pension officials chose to put other priorities ahead of the best rate of return. Those familiar with Rhode Island’s pension woes will recognize the name Dan Loeb, a hedge fund manager once employed by the state to invest on behalf of its then-$8 billion pension fund (now less than $7.5 billion). Loeb and his hedge fund provided ample returns to the state. However, because of private political activity that antagonized public sector unions, Loeb’s relationship with the state was ended. Rhode Island has not been better off for it, and until more stringent reforms to both pension funding and governance are revived, the Ocean State’s future looks bleak.

In Depth: Pension Reform

Modern, 401(k)-style plans are now commonplace in the private sector. For state workers, however, traditional pensions are still the norm. As former Utah State Senator Dan Liljenquist wrote in Keeping the Promise: State Solutions for Government Pension Reform, this is not a partisan issue, but a math problem. State Budget…

+ Pension Reform In Depth