Faced with dour financial news , members of the Retirement Board take it one step at a time by voting to seek an audit of its financial assumptions.

01:00 AM EDT on Thursday, August 12, 2004

BY SCOTT MacKAY
Journal Staff Writer

PROVIDENCE -- Speaking to a group of retired teachers recently, state General Treasurer Paul Tavares used a shopworn cliché to sum up the dilemma facing Rhode Island's state retirement system.

"I told them the good news for you is that all of you are living longer," Tavares said in an interview yesterday. "The bad news for the state pension system is that all of you are living longer."

Fueled by state employees and teachers retiring earlier and living longer -- and, some critics say, harvesting overly generous benefits -- Rhode Island's state pension system is facing a long-term financial crunch.

The problem: Without getting more money from taxpayers or employees, there is not likely to be enough money to support the pension benefits retirees have come to depend on in their golden years.

At the state Retirement Board yesterday, members wrestled with evidence from a consultant who advises the board on the state's liabilities to its thousands of teachers and state workers.

The numbers are in flux; the board voted yesterday to seek an audit of the financial assumptions it relies on to set future payments out of the roughly $6 billion in pension funds.

"The pie is not large enough for what we are facing," said Tavares.

A recent estimate by the board's pension consultant asserted that state and local taxpayers should pay $121.6 million more next year toward financing the pensions of state employees and public school teachers.

The money comes from three sources: taxpayer contributions, employee contributions and gains from investments in stock and equity markets.

State employees pay 8.75 percent of their weekly paychecks and teachers pay 9.5 percent toward the retirement fund. The state's contribution was 11.5 percent of payroll this year but would soar to 18.7 percent next year under recommendations put forward by the state actuarial consultants. The board voted yesterday to assume that the return on investments will be 8.2 percent, which is within the actual yield the fund has earned for the past 15 years.

"We are not bleeding, we are hemorrhaging," said Daniel Beardsley, executive director of the Rhode Island League of Cities and Towns, which represents local governments in the state's 39 communities. "Unless employer and employee address the situation, it will only get worse."

Local pension systems in some of the state's communities are also in trouble -- especially those in Cranston and Providence, according to estimates by the Rhode Island Public Expenditure Council.

Rhode Island labor leaders have long resisted changes that would cut benefits for employees and teachers.

George Nee, secretary-treasurer of the state AFL-CIO, said yesterday that the Carcieri administration, representatives of state employees and legislative leaders should consider the pay, pension and health-care issues as a basket of compensation topics that must be considered as one.

Tavares agrees. "In fairness to labor, they are looking at health care, pay and pension issues and it is up to the governor and the Assembly to develop some long-range plans about where they want to go with all this."

Under state law, the Carcieri administration must negotiate pay and health-care issues with the unions representing the more than 15,000 state employees, but the pension matters are set by the General Assembly in conjunction with the governor.

Carcieri appointed a pension review commission last year that studied the pension system. But the 12-member panel split along labor-management lines and in the end did not recommend any tough changes.

The problems have been building for years. In the 1980s, under then-Gov. Edward D. DiPrete, the state embarked on an early-retirement program for state employees that saved money in the short term but burdened the pension system with long-term liabilities.

Tavares, Carcieri and others have put forward proposals that would bring changes to shore up the system, make it affordable for taxpayers and continue to give teachers and state workers good retirement benefits.

Two years ago, Carcieri proposed increasing the employee and teacher share by 2 percent. The Assembly refused to go along after unions leaders complained that it was unfair to put the burden solely on employees. Rhode Island teachers and employees pay some of the highest contribution rates in the country.

Employee and teacher contributions were last raised -- by 1 percent -- in 1995, when Lincoln Almond was governor.

Another idea of Carcieri's that was rejected two years ago but may get a more receptive audience now would be to link retirees' annual cost-of-living increases to inflation, rather than the 3-percent stipends the law currently provides.

"This is what happens when people retire earlier but live longer. Someone may get a pension worth $25,000 at age 50 but they live for 33 more years and get a 3 percent COLA each year, so the pension becomes $50,000 or more a year," said Gary S. Sasse, executive director of the Rhode Island Public Expenditure Council, a business-financed government research group.

Another change that would save money would be to raise the minimum retirement age. Under current law, a state employee with 28 years of service can retire at any age.

Some members of the panel that studied the pension system also favored establishing a tier of reduced benefits for newer state employees and teachers, such as those who do not have the 10 years of service needed to become vested in the pension system.

"There are lots of things that can be done but we need some action in this area," Sasse said. "There will be less money for state aid to education and for state social programs if we do not make some progress in the retirement system."

While relations between labor leaders and the governor have not been good, Carcieri is poised to work with union leaders to forge change, said Jeff Neal, the governor's spokesman.

"He wants to work collaboratively with them and try and develop some solutions," Neal said.