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Public Pension Underfunding: Closing the Gaps Federal Reserve Bank of Cleveland

Public Pension Underfunding: Closing the Gaps Federal Reserve Bank of Cleveland. Rhode Island Retirement Security Act of 2011 Presentation by Richard A. Licht Rhode Island Director of Administration Friday, November 22, 2013. Who is Affected?. Rhode Island State Employees All RI teachers

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Public Pension Underfunding: Closing the Gaps Federal Reserve Bank of Cleveland

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  1. Public Pension Underfunding: Closing the GapsFederal Reserve Bank of Cleveland Rhode Island Retirement Security Act of 2011 Presentation by Richard A. Licht Rhode Island Director of Administration Friday, November 22, 2013

  2. Who is Affected? • Rhode Island State Employees • All RI teachers • 40% State • 60% Municipality • RI Municipal Employee Retirement System (MERS) • Optional • State Administered • 100% Local Contribution • Benefits set by statute not collective bargaining • Municipality must pay 100% of Annual Required Contribution (“ARC”)

  3. Not Affected Locally administered plans, “non-MERS”: • 36 plans • Benefits vary - collective bargaining • Mostly Police and Fire • No Requirement to make ARC payments

  4. Knowing the facts Leadership Willingness to compromise Comprehensive one-time reform Sharing the sacrifice Retirees Existing Employees Taxpayers Collaboration Governor Treasurer Speaker of the House Senate President Keys to Success

  5. Knowing the Facts 1999 • Funding status - 82% • Reamortized to 30 years - never missed a payment 2010 • Funding status - 58.5% • Unfunded liability - $4.7 billion May 2011: Changed assumptions • Investment return: 8.25% to 7.5% • Modernized mortality rates

  6. Knowing the Facts Consequences of changed assumptions: • Funding status: 48% • Unfunded liability: $6.9 billion Actuarial costs and contribution rates: • Normal cost: 11.4% State employees, 11.8% teachers • Employee contribution rate: 8.75% State employees, 9.5% teachers • Employer contribution rate: 23%

  7. FY 2002 Pension Costs Employer Contribution • $139 Million • 5.6% of Payroll • 3% of State Tax Revenue

  8. Projected Cost ($ Millions)

  9. Projected Cost (% of Payroll)

  10. The Solution- Retiree Sacrifice COLAs • Retirees retain pre-reform COLA increases • Future COLAs dependent on investment return • Applies only to first $25,000 (indexed) • Suspended until solvency achieved (80% funding) • Calculated as 5 year smoothed investment return less 5.50%, with 0% Floor and 4.0% Cap • COLA delayed until later of SSNRA or 3 years after retirement • Interim COLA once every five years

  11. The Solution- Active Employee Sacrifice Retirement Age • Non-vested: Social Security Normal Retirement Age (SSNRA) but not greater than 67 • Vested not eligible to retire: proportional to SSNRA but minimum 59-option to keep current retirement age • Eligible to retire: no change

  12. The Solution- Active Employee Sacrifice Hybrid Plan Defined Benefit • Retain all accrual to June 30, 2012 • 1% accrual per year after July 1, 2012 • Employee contribution rate 3.75% • Vesting reduced from 10 to 5 years Defined Contribution • Mandatory • 5% Employee contribution • 1% Employer contribution • Vesting after 3 years • Non-Social Security Communities: Additional contribution • Teachers: 2% Employee, 2% Employer • Police: 3% and Fire: 3%

  13. The Solution- Active Employee Sacrifice MERS Police and Fire • Minimum retirement age 55 with up to 25 years of service • Transition rule: if 45 and 10 years, then 52 • 2% accrual rate State Police • Reduces accrual rate to 2% • Reduces CLA • Five year average compensation Judges • Increase contribution rate to 12% • Reduces COLA

  14. The Solution- Taxpayer Sacrifice Reamortization • Increased from 19 years to 25 years

  15. Legal Challenge • Is Statute a contract? • Is impairment substantial? • Is there a valid public purpose? • Now in Mediation – Court-Ordered Gag Order

  16. State Employee Retiree Health (“OPEB”) State Employees Unfunded OPEB Liability:  $775 million Created OPEB Trust in 2011.  Funded ratio at 1%. Amortized over 25 years. FY2014 State Employee ARC:   7.84% of payroll

  17. Unfinished Business Locally-Administered Business (36 Plans) • $2.1 billion unfunded liability • Based on aggressive assumptions • Collective funded ratio 40% • 24 less than 60% • 9 less than 30% • 18 are not meeting ARC payment • Locally-Administered Pension Plans Study Commission

  18. Locally-Administered Pension Plans Study Commission • Municipalities with plans in Critical Status (below 60% funded) required to notify participants / beneficiaries of the plan, General Assembly, Department of Revenue, Auditor General of the critical status no later than 30 business days following the certification • Required to submit a reasonable alternative funding improvement plan to emerge from critical status • Provides recommendations on OPEB; does not address local pension plans in the state system (MERS) • Developed funding improvement guidelines

  19. What Happens When You Do Not Reform: Central Falls – A Case Study • City faced major fiscal issues, including a $6 million operating deficit and $79 million in pension and health care obligations • Stave appointed receiver who subsequently filed a petition under Chapter 9 Federal Bankruptcy in August 2011 • Pensions were reduced up to 55% • Emerged from bankruptcy in Fall 2012, with court-ordered balanced budgets for FY 13-17

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