PROVIDENCE, R.I. (WPRI) – The shortfall in Rhode Island’s two major pension funds grew for the second straight year in 2015-16, new data shows.
The shortfall in the pension funds for state employees and teachers stood at $4.63 billion as of June 30, up by $80 million compared with a year earlier and by $279 million versus two years earlier, according to an annual report by the state’s outside actuary, Gabriel Roeder Smith & Co. of Texas.
The report shows the state’s pension funding levels – which measure how much of the state’s long-term liability could be covered by its current assets – fell by about half a percentage point each, with the fund for state employees falling to 56% and the fund for teachers falling to 58.3%.
The State Retirement Board approved the report Wednesday.
The uptick in the unfunded pension liability follows a down year for the state’s investment portfolio, which lost 0.2% in 2015-16. It also includes the impact of a legal settlement that ended various union challenges to the 2011 pension overhaul; their lawsuits were dropped in exchange for some benefit increases.
Before the changes made in 2011, the shortfall in the two major pension funds was significantly larger, with an unfunded liability of $6.8 billion and funding levels of about 48% for both.
Despite the settlement’s higher costs, the two pension funds remain today about where actuaries forecast they would be back when the 2011 overhaul was passed.
At $1.94 billion as of June 30, the shortfall in the fund for state employees remains smaller than was forecast five years ago, which has been the case in each year since the law passed. That gap has been narrowing, however, and is now little more than a rounding error at just $12 million. And in the fund for teachers, the shortfall is now slightly higher than was expected five years ago.
Much of the pension system’s health is based on the performance of its investments. General Treasurer Seth Magaziner, who oversees the system, recently announced he will reduce the pension portfolio’s commitment to high-cost hedge funds by more than $500 million as part of what he calls a new “Back to Basics” strategy; the old strategy had been put in place by Gov. Gina Raimondo, his predecessor as treasurer.
In a statement, Magaziner noted that the pension portfolio’s investment performance has been strong enough that most retirees will receive an interim cost-of-living adjustment (COLA) in 2017; the 2011 overhaul suspended annual COLAs for roughly two decades to shore up the system. His office said the COLAs will be 0.74%, averaging about $200.
“I’m glad that most members will receive a COLA in 2017, but we are taking steps to improve performance in the future,” Magaziner said. “We will continue working hard to make the pension system healthier and more sustainable for our public employees and all Rhode Islanders.”
The State Retirement Board’s assumptions forecast that the pension fund will earn an average of 7.5% a year; the actual average from 2006 to 2016 was 5.9%, according to the new valuation. Magaziner has suggested the board may lower its investment forecast next year, which would further increase the shortfall.
Among former state employees in the system, the average retiree with a standard pension was a 73-year-old receiving an annual benefit of $31,871. Among former teachers, the average retiree with a standard pension was a 71-year-old receiving an annual benefit of $44,822. There were about 11,000 retirees in each group.
Many retirees remain angry that state leaders reduced their pension benefits, and one labor leader recently suggested unions may ask lawmakers to consider a further restoration of benefits or some other stipend for them.
Rhode Island’s state spending on pensions has exploded since 2000, with the annual taxpayer contribution for state employees’ benefits jumping from 8% of payroll in 2000 to nearly 26% in the latest valuation.
Rhode Island taxpayers must contribute $409 million to the pension system for state workers and teachers in the current fiscal year, according to the actuarial valuation. That amount is projected to keep rising as the state slowly pays down the liability it built up over many decades of unfunded pension promises.