The retirement plan for teachers and state workers is in trouble, though there is no consensus on what it will take to keep it afloat.

01:00 AM EDT on Monday, May 30, 2005

BY SCOTT MAYEROWITZ
Journal Staff Writer

PROVIDENCE -- This appears to be the year for pension reform.

The issue has been floating around for a while, but with mounting costs squeezing local and state budgets, government leaders are buckling down to change the retirement system for teachers and state employees.

Governor Carcieri and General Treasurer Paul J. Tavares introduced plans earlier this year that would dramatically overhaul the system.

The question now is: To what degree will lawmakers actually change the system?

The House and Senate are expected to unveil plans in the next two to three weeks.

House Speaker William J. Murphy has pledged "meaningful pension reform" but has not been willing to sit down and discuss what that actually means.

"We have a system right now that needs help," said Murphy, D-West Warwick. "We're committed to doing pension reform and something will be done this year."

Senate President Joseph A. Montalbano said that the legislature plans to implement a minimum retirement age, probably increase the number of years of service needed to retire, change the percent of salary earned for each year of service, and eliminate the automatic 3-percent cost-of-living-adjustments retirees now get each year.

"It is going to happen this year. It is very necessary and there's nobody with a monopoly on good ideas in this area," said Montalbano, D-North Providence. "The governor has a plan, the general treasurer has put one forth, and the legislature is working on one."

Montalbano said that workers not yet vested in the state system -- those with less than 10 years of service -- are going to be affected "in a very significant way."

RHODE ISLAND'S pension system is financed through contributions from employees, contributions from employers, and the return on plan investments.

Employee contributions are fixed at 8.75 percent of pre-tax salary for state workers, and 9.5 percent for local teachers. The rest of the cost is made up by the state and the communities.

The state put $118.9 million into the pension fund this year. That figure is expected to jump to $174.3 million next year, if there are no changes to the system. Within five years, it would climb to $255 million, if there are no changes, according to the governor's office.

The state's cities and towns face a similar problem. This year, they contributed $72.3 million for teachers' pensions. Next year, without any changes, that would climb to $103.4 million, and within five years, to $149 million.

"This problem is not going away, it's going to get worse," said Carcieri, who has been pushing for pension reform since he took office in 2003.

Without change, Carcieri has warned, the state will be forced to make "dramatic tax hikes or dramatic cuts in the programs that serve our most- vulnerable citizens."

But he hopes it won't come to that, the Republican governor said; he believes the Democrat-controlled Assembly will act now.

"My expectation is that they will do something," Carcieri said. "My fear is that they will do much less than we need to do."

Treasurer Tavares says he also fears that the Assembly will just do something "cosmetic," and that next year, the state will face the same problem.

However, he added, "my conversations with both the House and the Senate have led me to be very optimistic. . . . They acknowledge and realize that something has to be done."

But even if changes do come, pension costs are still expected to rise.

The plans proposed by Carcieri and Tavares both cut into next year's anticipated contributions -- but would only cut the increase roughly in half. Under Carcieri's plan, the state would still have to put $27 million more into the pension fund next year than it is putting in this year.

THERE ARE SEVERAL reasons for the state's current pension problem.

The first -- and most significant, according to Tavares -- is that people are living longer. When pension systems were first designed, workers only lived a few years after reaching retirement, he said. Today, people retire and live for 20 years or more, collecting a pension during each of those years.

"That's a good thing," Tavares said of the longer life expectancy. "But there's no free lunch. The money for that has to come from somewhere."

The second reason involves the performance of the stock market and the state's investments. The actuaries use a five-year averaging period to calculate future contributions. Because of that, the state is still hurting from the market losses of 2000, 2001 and 2002, Tavares said.

The other main contributing factor, he acknowledged is the state's failure in past years to fully finance the pension system.

"A portion of this is due to past sins," Tavares said.

The most significant of these was in the mid-1980s, when the state offered early retirement to its workers, but failed to add money to the retirement system for all the people who were suddenly collecting pensions.

Tavares said he had "no doubt" that in past years, the state did not always contribute the full amount it was supposed to. That's why he believes that some of the burden must now be covered by the state.

The state's labor unions place the blame squarely on the state.

Robert A. Walsh Jr., executive director of the National Education Association Rhode Island, acknowledges that "there are some demographic changes," but said the problem rests primarily with the state's not fully financing the system.

Year after year, Walsh said, teachers and state workers have contributed a large portion of their salaries to the system. They have held up their end of the bargain, he said.

If there are going to be reductions in retiree benefits, Walsh condends, the employee contributions should also be reduced.

"I'm not necessarily saying we need to leave the system as is," Walsh said. However, discussions need to be held "in a balanced way," instead of the "teacher and state-employee bashing" that he contends the governor is conducting.

UNDER THE CURRENT system, state employees can retire at any age, with no reduction in benefits, as long as they have 28 years of service. Otherwise, they can retire at age 60, with at least 10 years of service. Pension benefits are based on years of service, so those who have served less than 28 years would get a smaller pension.

Carcieri and Tavares both propose instituting a minimum retirement age. Carcieri is seeking to make the minimum age 60, with 30 years of service, or otherwise, age 65. Tavares proposes age 58, with 30 years of service, or 62, with 5 years. (Tavares is also suggesting an option where workers at age 55, and 20 years of service, can retire with reduced benefits.)

Both the governor and the treasurer propose to reduce the amount of benefits retirees would receive. State employees now stop accumulating credit toward their pension after 35 years, maxing the system out at 80 percent of their salary. Carcieri and Tavares want to lower the maximum benefit to 75 percent, after 38 years of service.

The changes would apply only to new hires to state government, or to current employees who have less than 10 years of service and are not yet vested in the system.

The two officials, however, differ on what to do with the cost-of-living adjustments that retirees get. Currently, employees start getting the 3-percent COLA on the third January after they retire.

Carcieri wants to tie COLAs to the national Consumer Price Index, a measure of inflation. Benefits would increase annually according to the CPI, or at 3 percent, whichever is lower.

Tavares wants to take the changes one step further. While Carcieri would only change the COLA for new hires and those not vested, Tavares wants to implement the same changes for everybody -- all employees and all current retirees.

Will lawmakers go as far?

"I don't think we'll go further," Montalbano said. "I think we'll, hopefully, take some of the best parts of all of it, and come up with a plan that we hope the governor will sign on to."