Study: RI pension bill ‘a good approach’ – and it may be legal

Raimondo and Deputy Treasurer Mark Dingley

A leading Washington think tank will weigh in Friday with a mostly favorable review of the Raimondo-Chafee pension overhaul – and a crucial explanation of why its legality could be upheld by the courts.

“In general, we think this is a good approach,” Bill Tucker, managing director of the nonpartisan think-tank Education Sector and co-author of the new study, told WPRI.com. It focuses on two aspects of the bill: how it proposes to close the funding shortfall, and what sort of retirement the revamped system would allow.

Tucker said the bill as drafted avoids the two extreme pension fixes Education Sector has seen proposed elsewhere: fixing the system by slashing benefits for current workers to make them pay for retirees, as Illinois has done, or “basically casting teachers into the same retirement insecurity that a lot of the country faces.”

Education Sector’s study offers a more nuanced view – and a Rhode Island-oriented one – than the report issued Monday by the National Institute on Retirement Security, which defended defined-benefit pensions and criticized pure 401k-style defined-contribution plans. (The Raimondo-Chafee bill would combine both in a hybrid plan.)

Rhode Island’s current “pension system discriminates on the basis of age; it arbitrarily rewards certain ages and years of service over others,” Tucker and his co-authors – Jennie Herriot-Hatfield, Amy Monahan and Sarah Rosenberg – write in their study.

That has perverse effects, they argue: it rewards teachers for sticking around even if they’re burned out, and it penalizes those who enter the profession late, leave it early or switch states. It also ignores research showing that once teachers gain five years of experience, there is little difference in effectiveness as their tenure increases.

The Raimondo-Chafee bill would tackle those drawbacks, they say, because its hybrid plan “is both portable and age-neutral and moderates the employee’s risk by including a defined benefit.”

As for closing the pension fund’s shortfall, the Education Sector study says the Raimondo-Chafee bill “mostly succeeds in sharing the burden,” but adds: “Retirees bear the greatest load of all: as the years pass without a COLA, those with small pensions will see their buying power decrease.”

They offer some dramatic examples to show how painful the COLA freeze will be. In 2011 dollars, a retired teacher who currently has an annual pension of $59,395 would see it decline to $43,000 after 10 years and $33,300 after 19 years – a 44% drop – and a retiree with an $11,212 pension would be down to $8,400 after 10 years.

To deal with that, the authors suggest lawmakers amend the bill to “reintroduce COLAs more quickly for retirees with the smallest pensions” so “Rhode Island does not fix its finances by impoverishing its retirees.” And they remind legislators that raising taxes is always an option, even if they don’t like the idea.

For local pension-watchers, though, the most fascinating section of the study is the extended analysis of the pension bill’s legality by Monahan, a law professor at the University of Minnesota who is one of the nation’s leading experts on pension law.

Monahan thinks the proposed COLA freeze for current retirees is an “impermissible” violation of a contract right, which means the U.S. Supreme Court would only allow it for an important public purpose, “such as the remedying of a broad and general social or economic problem.” And she thinks Rhode Island could make a solid case.

Since that question is so pivotal to the pension debate and so hotly contested locally, it’s worth quoting Monahan’s analysis at length (emphasis mine):

A state’s “police power” refers to its power as a sovereign to act to protect the health, safety, and welfare of its citizens. Even where the state is bound by a contract, as in the case of COLAs for Rhode Island’s current retirees, it always retains its police power. …

There are very few cases addressing detrimental changes to public employee pensions where the court has found a substantial change to be a valid exercise of a state’s police power. In a recent case in Minnesota, the court held that the state was permitted to temporarily reduce the COLA for public employee pensions as part of a broad plan to address plan underfunding pursuant to its police power. In upholding the COLA reduction, the court noted that all interested parties (current employees, retirees, the state, and the taxpayers) were sharing in the burden associated with remedying the plan’s underfunding, and that the court was hesitant to interfere with the apparently reasonable legislative judgment regarding the preferred method for addressing such underfunding. The court rejected the argument that the state needed to pursue other remedies, such as raising taxes, before reducing retirees’ COLAs.

The proposed pension reform legislation in Rhode Island has much in common with the Minnesota case: it declares that the state’s pension system has reached an “emergency state,” proposes a temporary adjustment, and seeks to share the burden across current employees, retirees, and taxpayers.

It is important to keep in mind, however, that there is no objective test that is used to determine whether a state may validly exercise its police power. Rather, it is always a fact-intensive, case-by-case inquiry.

So why did Education Sector take such an intense interest in the retirement system of the nation’s smallest state?

“It was a little fortuitous,” Tucker said. Last spring, the group commissioned Monahan to look at the legal landscape on pensions in five key states, and picked Rhode Island as one of them. “When things did move forward quick, we said, ‘Look, we need not just a legal analysis – we need to look at the plan, the entire angle.'”

Tucker said he thinks if a version of the Raimondo-Chafee proposal passes, it could serve as a model to other states. He noted Calif. Gov. Jerry Brown – who, like Chafee, is a liberal elected with significant support from teachers unions – has just proposed a surprisingly sweeping pension overhaul, too.

“We decided we really wanted to look at this very closely, because here is perhaps one of the really important case studies of a state trying to do this, and arguably trying to do this right,” Tucker said of Rhode Island. “There’s obviously a lot of political courage happening here – potentially. We’ll see.”

The full study is available as a PDF on Education Sector’s website.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

(photo: Ted Nesi/WPRI)

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