Reacting to figures adopted today by the State Retirement Board, Governor Donald L. Carcieri today warned that state-mandated contributions to the pension system are growing at a very significant pace and called on lawmakers to quickly remedy the situation by enacting the GovernorÂ’s pension reform package proposed in this yearÂ’s budget.
"I am tackling this very thorny issue head-on. It must be done today," said Governor Carcieri. "My proposed budget for FY Â’04 calls for reforms to the overall personnel system."
The Governor has proposed that employees and teachers contribute an additional two percent of their salaries to fund their own pension plans—thus reducing the financial load on State and municipal governments. Rhode Island’s pension system currently faces an unfunded liability of $2.2 billion.
This morning, the State Retirement Board adopted employer contribution rates for FY05 for the state employee and teacher retirement systems, based on the report of the systemÂ’s actuary. The employer rates are increasing significantly over FY04.
State Employees. Under current law for FY04, the employer contribution for state employees is 9.6% of payroll, or $56.8 million. This assumes current law, not including the GovernorÂ’s proposed 2% shift in contributions.
The rate adopted today for FY05 will increase the employer contribution to 11.51% of payroll, or $71.2 million – an increase of $14.4 million over FY04 – a 25% increase in one year. Even if the 2% shift becomes law, the $14.4 million increase in state contributions from FY04 to FY05 remains the same.
Teachers. Under current law for FY04, the state employer contribution for state employees is 5.73% of payroll, or $45.5 million. This assumes current law, not including the GovernorÂ’s proposed 2% shift in contributions.
The rate adopted today for FY05 will increase the state employer contribution for teacher pensions to 6.12% of payroll, or $51.0 million – an increase of $5.5 million over FY04 – a 12% increase in one year.
The local employer share will increase from $63.4 million in FY04 to $73.3 million in FY05 – an increase of $9.9 million – a 16% increase in one year.
Reason for the increase. Investment returns in FY01 and FY02 are far below the assumed return of 8.25% and are the driving force behind the rate increase. The five-year smoothing technique for investment returns used by the systemÂ’s actuary recognized a 0.9% increase in asset values in FY02 versus the actual market return of -8.4% in FY02. Because of negative investment returns in recent years, employer contribution rates are likely to go even higher in years beyond FY05.
Funded Ratio. Because of this investment performance, the retirement system is becoming even more underfunded. The funded ratio of assets over liabilities decreased from 77.9% to 71.7% for state employees and from 77.4% to 73.2% for teachers.
An additional element of the GovernorÂ’s budget proposal entails capping the annual Cost of Living Adjustment (COLA) on pensions for new retirees to the lower of three percent or the actual cost of living. Presently, State retirees receive an automatic three percent COLA, despite the fact that the consumer price index was valued at a tame 1.8 percent last year. Consensus economic forecasts peg inflation at an equally tame 2.3 percent in coming years. In contrast, Massachusetts State retirees are not guaranteed any COLA.
In total, the GovernorÂ’s pension reforms would save State taxpayers more than $18 million in 2004. Municipalities would save an additional $9.5 million --- money that could be earmarked to fund public education.
"Some critics have suggested that I am balancing this budget on the backs of State employees and teachers. Nothing could be further from the truth," said Governor Carcieri. "Employee pension reforms represent less than eight percent of the solution to the $200 million budget problem .We are all sharing the burden. I value the work of our talented employees and dedicated teachers. My wife and I were both teachers. I have the utmost respect for the profession. However, tough economic times require that tough decisions be made in order to be fair and equitable to all Rhode Islanders----particularly the poor and the most vulnerable."