Why the pension settlement may save even more than $3.9B

Much of the reporting about last week’s pension settlement has focused on the number $3.9 billion, which is the amount of savings the deal would lock in compared with the status quo before the 2011 overhaul.

But that may actually understate the amount of savings state officials would lock in by getting unions and retirees to approve the settlement. The reason is because under the terms of the deal, the unions and retirees wouldn’t just drop their lawsuits challenging the 2011 law – they’d also drop an earlier lawsuit that aims to overturn pension changes made by the General Assembly in 2009 and 2010.

The savings from the 2009 and 2010 changes weren’t included in the estimates put out during last week’s settlement announcement, which used as its baseline the unfunded pension liability at the time of the 2011 overhaul (currently estimated at $8.9 billion, including $8.3 billion for state employees and teachers). There’s no comparable estimate for the 2009 and 2010 changes available online at this time.

Nevertheless, to get a full picture of how much the unions and retirees are agreeing to give up under the terms of the proposed settlement, you’d want to add in the savings from the 2009 and 2010 changes – because if they wound up prevailing in full in court, the clock would be set back to the pre-2009 pension system, not the pre-2011 one. And they already won the first round fighting the 2009 and 2010 changes.

To get a sense of how much money we’re talking about, take a look at the actuarial valuation conducted after the 2010 changes (sometimes described as “Article 16″ because of the state budget provision that enacted them). Passage of Article 16 led the actuaries to reduce the unfunded pension liability for state employees and teachers by nearly $114 million.

And that was all before the State Retirement Board’s April 2011 vote to lower its expected investment return and change its longevity forecast for retirees. Those sharply increased the unfunded pension liability overall, so they’d also likely increase the size of the savings from the 2010 changes. And all this is before we even look at whatever money was saved from the previous round of pension changes in 2009.

Put it all together and it seems that, by ending challenges to three separate rounds of benefit reductions, the pension settlement could lock in a reduction in the state’s unfunded liability of more than $4 billion.

• Related: Chart: RI’s pension shortfall, with and without the settlement (Feb. 17)

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