Treasurer Gina Raimondo was just three years old and President Nixon had only recently resigned on Oct. 15, 1974, the day Rhode Island leaders got a stark warning: the state pension system was in serious trouble.
The alarm bell was rung by A.A. Weinberg, an actuarial consultant from Chicago who by then had been watching over the Rhode Island pension system for a quarter-century. The pension system’s liabilities were mounting fast, he said, but lawmakers and workers didn’t seem to care.
“A change of attitude and remedial and corrective measures are imperative if the retirement system is to survive and fulfill its functions and stated objectives for present employees as well as future participants,” Weinberg wrote in his 1974 report on the pension fund [pdf].
Among those Weinberg was trying to influence that day were two powerful Democrats: then-House Speaker Joseph Bevilacqua, who later resigned as chief justice of the R.I. Supreme Court because of his Mafia ties, and then-Gov. Philip Noel, who won a second term the following month.
By Weinberg’s calculations, the pension fund for state employees had only 53% of the assets required to cover future benefits as of July 1, 1974. The fund for teachers was in even worse shape: its assets would only cover 23% of its future obligations.
Decisions made in 1974 helped illustrate how the problem arose. Weinberg calculated the state should contribute $25.5 million to the pension fund that year; only $7.4 million was deposited. He also determined cities and towns should deposit $24.6 million; they put in $11.2 million.
On top of that, the total amount of pension benefits to be paid out was forecast to more than triple over the next decade: from $22.5 million in 1974 to $40.2 million in 1979 and $68.7 million in 1985.
The trends clearly alarmed Weinberg, who used his actuarial update on the system for 1974 to lay out in painstaking detail why Rhode Island’s current approach to funding retirement benefits was a recipe for disaster. A sample (emphasis added):
[T]here appears to be a startling lack of understanding among public officials and the participants as to the potential adverse implications of inadequate funding of the accruing pension cost. Continuously mounting actuarial deficits, if not viewed with complacency, are at least not considered with that degree of concern which such a situation demands. As long as the retirement system is able to meet its annual expenditures, the officials and participants are inclined to believe that financial stability and solvency exists as to future needs as well.
If there is any concern among the employees or officials of government about future financial requirements, the officials and employees are further inclined to negate the possibility that the public will refuse to underwrite these costs as the benefit payments mature. Perhaps, mingled with these attitudes is the feeling that though future generations of employees may be affected, the problem is of no concern to present employees, a sort of “let the future take care of itself” psychology. Whatever may be the reason behind this lack of official and employee concern, the fact is that it is unrealistic.
Weinberg was prescient: nearly four decades after he wrote those words, in 2011, Rhode Island lawmakers did indeed refuse to underwrite the costs of the pension benefits awarded without funding in years past, passing the landmark overhaul that cut benefits for retirees and active workers.
By 1974, Weinberg had been the state pension fund’s actuary for most of its 38-year existence – he was hired in 1949, the year teachers joined the system – and he recalled that Rhode Island had at one time handled retirement benefits more responsibly. When the fund was first created in 1936, he explained, the “principle of funding pension cost as it accrues was in fact recognized …. The principle was consistently adhered to for some years until a change in priority occurred.”
But Weinberg went on to say that in recent years there had been “a steady and persistent increase in the unfunded accrued liability” because of a failure to pay for both the benefits already awarded and “continued liberalizing changes in benefits and qualifying conditions.”
He continued: “While the Retirement Board has been alert to the problem and has been constant in calling attention to the cost aspects of new amendatory proposals for improved benefits and increased pension credits in reports on new legislative proposals, its efforts to curtail or arrest the trend have been unsuccessful.”
Weinberg offered two major proposals that year to stabilize the pension system.
First, he “strongly recommended” that state agencies include the full cost of funding each employee’s pension benefits in their annual budgets to be “paid concurrently with the payment of salaries.” Doing so, he said, would show the true cost of personnel and ensure future payments.
Second, he recommended gradually increasing pension contributions over the next five years. For the state, the annual deposit as a percentage of payroll should rise 1.5 points per year, from 6.5% to 14%, while municipalities should increase by 2 points per year, from 9% to 19%.
“Under this method of adjustment, full funding of the accruing pension obligations would be achieved in the course of several years without too much disruption in the financial budgets of the State and Cities and Towns,” Weinberg explained. He was apparently ignored: The Providence Journal’s Katherine Gregg described the 1980s as “a decade-long binge of generosity” as lawmakers continued to sweeten pension benefits without funding.
That probably wouldn’t have surprised Weinberg.
“The most perfectly conceived and financially sound retirement plan for public employees may, by virtue of factors that may be wholly irrelevant under a private insurance program, find itself in the course of time in an unsatisfactory financial condition,” he wrote in 1974.
He continued: “Irresistible pressures for increased salaries with the consequence of larger pension benefits, without a corresponding provision of revenues to the retirement system to meet the rise in pension costs occasioned thereby, inevitably result in the accumulation of unfunded liabilities.”
And those unfunded liabilities, Weinberg said, get “shifted to future generations.”