PROVIDENCE, R.I. (WPRI) – General Treasurer Seth Magaziner wants to make it easier for Rhode Island’s troubled independent municipal pension plans to join the state-run system, arguing that doing so will reduce fees, improve returns and enforce fiscal discipline.
Currently, 24 Rhode Island cities and towns manage a total of 34 independent local pension plans for their workers and retirees. The financial status of those plans has been a widely acknowledged problem for years, with their combined shortfall estimated at $2.5 billion – including almost $1 billion in Providence alone.
“Rhode Island’s biggest challenge today is municipal pensions,” Magaziner, a Democrat, told Eyewitness News. “I believe that strongly.”
Back in 2013, a Target 12 investigation revealed cities and towns were all over the map when it came to the investment performance of their independent pension plans and how much they paid to manage the money, with some places failing to track basic data about their assets.
Magaziner said many communities would like to join the state-run Municipal Employees Retirement System (MERS), which centralizes investment and management decisions for 116 local pension plans. He said the MERS plans are 83% funded, and have a combined shortfall of just $300 million.
“By and large, the state, just from scale and access to more professional management services, tends to perform better, especially than smaller communities,” he said.
Over the years, however, local leaders have complained that the rules for moving an independent plan into MERS were too strict to make doing so feasible, particularly for underfunded plans. Magaziner said he is proposing legislation, introduced this week, that aims to address that.
“We’re not trying to force anybody in, but we are trying to reduce the barriers to entry because we’ve gotten feedback from some communities that they are interested and the rules up to now have just been too rigid for them,” he said.
Specifically, Magaziner’s proposal would allow municipalities that join MERS to pay down their unfunded liabilities over longer periods of time, rather than on the same 20-year schedule as the state, and to continue offering less generous benefits than MERS does for workers who are already active. In addition, legacy pension plans that are closed to new members would be allowed to have the state take over investment and management responsibilities without formally joining MERS.
“We want to get everything uniform again eventually, but we want to give these communities a way to ease into it so their costs don’t spike in the short term,” Magaziner said. “We’re trying to make it less of a one-size-fits-all, because different plans have different needs,” he added.
Magaziner emphasized that the proposal does not involve putting state money into the local pension plans, and said allowing them into MERS would not impact the funding of plans that are already in the state-run system. He also suggested joining MERS could force communities to be more responsible about making their annual required pension contributions.
“There are some pretty strong sticks to get communities to be responsible” in MERS, he said, such as withholding state aid or taking legal action if they fail to make their contributions.
Rhode Island isn’t the only state debating whether municipal pension plans should be brought into the state-run system. The Pioneer Institute, a Boston think tank, released a study last month estimating local Massachusetts plans lost out on at least $2.9 billion over the last 30 years because their performance trailed the state system’s.
“Local taxpayers are ultimately on the hook when pensions are underfunded,” Jim Stergios, Pioneer’s executive director, noted when the study was released. “This is going to sound really elementary, but it’s critical we don’t forfeit billions of dollars in investment returns.”
Magaziner’s proposal comes as his staff finishes work on a report, due by April 30, that will break down the 34 independent pension plans’ investment performances and fees. The report is required under a new law successfully pushed by Sen. Ryan Pearson, D-Cumberland.
“I’ll say it’s been very challenging to collect data from the municipalities,” Magaziner said. “Most of the municipalities have been very cooperative, but they don’t all report in a uniform way. So we’re working very hard to try to make this report as accurate as possible.”