Because of inaccurate estimates, the state is setting aside far too little money to cover the pensions of current and future retirees, a consultant says.

01:00 AM EDT on Tuesday, August 3, 2004

BY KATHERINE GREGG
Journal State House Bureau

PROVIDENCE -- State and local taxpayers should pay a whopping $121.6 million more next year toward the pensions of state employees and public school teachers.

That advice, from the state's pension-funding adviser, sent shock waves through the hearing room where top labor and government officials gathered yesterday for what they thought would be the last meeting of the "pension-review team" that Governor Carcieri launched late last year.

In late June, the deadlocked panel voted 6-6, defeating a series of moves recommended either by Carcieri, a Republican, or state treasurer Paul Tavares, a Democrat, to rein in the escalating cost of public-employee pensions, such as the adoption of a mininum retirement age.

But yesterday's news seemed to surprise some of the union leaders who had resisted any changes in pension eligibility and benefit levels.

"I feel embarrassed going ahead and issuing a report that we now know is faulty, that the conclusions we drew are . . . no longer based on fact," said Marcia Reback, president of the Rhode Island Federation of Teachers.

"It's an extraordinary number," said Jerome F. Williams, the chief operations officer for the Department of Administration. "I don't know how the state is going to be able to afford this level of increase, coupled with everything else that we have."

The warning was the result of a reexamination, by the state's actuarial advisers at Gabriel Roeder and Smith, of the assumptions that determine how much money must be set aside now to cover all the promises made to current and future retirees.

After looking back seven years, the firm concluded the state has been overestimating investment returns; underestimating the salary increases, averaging 4.5 percent annually, over the seven years that ended on June 30, 2003; and failing to account for the disproportionately large number of Rhode Island public employees who stay in their jobs long enough to qualify for pensions.

The state retirement fund draws its money from three sources: taxpayer contributions, employee contributions and investment gains. Only the employee share is set in stone by law, at 8.75 percent of pay for state workers, 9.5 percent for teachers.

That leaves the state's public employee retirement fund dependent on the stock market -- and taxpayers -- to make up for any potential shortfalls.

But the actuaries, as a starting point, have advised the state to lower its assumed rate of return on the investment of the pension fund's $5.3 billion in assets from 8.25 percent to 8 percent to more accurately reflect the state's actual experience.

Next, the firm advised a dramatic increase in what the state contributes to state-employee pensions, from 11.51 percent of payroll this year to 18.72 percent starting July 1, 2005.

THE RESULT would be a whopping $50.9-million increase in the state's annual contribution, from a projected total of $71.7 million this year to $122.6 million next year for state workers alone.

For teachers, the actuaries recommended an even more dramatic increase in state and local contributions, from 14.84 percent of payroll this year, or $124.7 million, to 21.75 percent next year, or $195.4 million.

The actuaries' report was first aired at a mid-July meeting of the state Retirement Board. It clearly stunned some members of the pension-review team that Carcieri assembled late last year in hope the group would craft a reform package before the legislature went home this year.

But the study went months longer than he anticipated. And when it came time to vote, the 6 union leaders on the 12-member panel voted as a bloc against every change in benefits that the Carcieri administration or Tavares recommended. Most changes would have affected only newly hired workers or those not yet vested in the system.

One such change would have set age 57 as the minimum retirement age for state workers and teachers who can now retire, at any age, after 28 years of service. Another would tie cost-of-living increases to the Consumer Price Index, up to a maximum of 3 percent. With guaranteed 3-percent annual increases now, the retirees have, in recent years, beat the CPI yearly.

Instead, the union leaders suggested, for example, dedicating any future increases in gambling revenue -- from any source -- to the pension system.

While several of her labor colleagues looked on glumly, Reback articulated their joint concern at having to wrestle with another huge money issue at a point when most state employee labor contracts have expired and the governor is openly seeking concessions in return for raises.

"Almost everyone in this room is faced with . . . two other big gorillas," she said. "We've got health care that we are looking at, and we've got salary increases we're looking at," and now "they are looking for changes in retirement at the same time."

"So it's, you know, which shoe drops first," said Reback, acknowledging that the actuaries' report would force, at the very least, some further discussion of "the enormity of the increased liability for the state."

In the end, the stalemated pension panel decided to put off a final vote on its report until after the state Retirement Board -- which is charged with setting pension contribution rates -- meets Aug. 11 to decide what to do about the actuaries' recommendations.

Said Gary Sasse, executive director of the Rhode Island Public Employees Retirement System: "The original report that was prepared before the latest numbers showed that we had a pension system the taxpayers could no longer afford and we needed to look at the contribution levels by the employer and employee, as well as benefit levels. These numbers today just throw gasoline on the fire."

"It's not a pretty picture," echoed Tavares, the Retirement Board chairman. "And the longer you wait . . . the harder it is going to be. There is no easy fix."