October 8, 2012

RI foreshadows fight over $1.4T shortfall in state pensions

Cities and states around the country are shoring up battered retirement plans by reducing promised benefits to public workers and retirees.

David Klepper / The Associated Press

PROVIDENCE, R.I. — Retired social worker Jim Gillis was told his $36,000 Rhode Island state pension would increase by $1,100 next year to keep up with inflation. But lawmakers suspended annual increases, leaving Gillis wondering how he'll pay medical bills and whether he'd been betrayed by his former employer.

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Retired social worker of Warwick, R.I. , was told his $36,000 Rhode Island state pension would increase by $1,100 next year to keep up with inflation. But lawmakers suspended annual increases, leaving Gillis wondering how he'll pay medical bills and whether he'd been betrayed by his former employer.

AP

"When you're working, you're told you'll get certain things, and you retire believing that to be the case," Gillis said. He and other retirees are challenging the pension changes in a court battle that's likely to have national implications as other states follow Rhode Island's lead.

Cities and states around the country are shoring up battered retirement plans by reducing promised benefits to public workers and retirees. All told, states need $1.4 trillion to fulfill their pension obligations. It's a yawning chasm that threatens to wreck government budgets and prompt tax hikes or deep cuts to education and other programs.

The political and legal fights challenge the clout of public-sector unions and test the venerable idea that while state jobs pay less than private-sector employment, they come with the guarantee of early retirement and generous benefits.

The actions taken by states vary. California limited its annual pension payouts, while Kentucky raised retirement ages and suspended pension increases. Illinois reduced benefits for new employees and cut back on automatic pension increases. New Jersey last year increased employee retirement contributions and suspended pension increases.

Nowhere have the changes been as sweeping as in Rhode Island, where public sector unions are suing to block an overhaul passed last year. The law raised retirement ages, suspended pension increases for years and created a new benefit plan that combines traditional pensions with something like a 401(k) account.

"This saved $4 billion for the people of Rhode Island over 20 years," said state Treasurer Gina Raimondo, a Democrat who crafted the overhaul. "Rhode Island is leading the way. I expect others to follow, frankly because they have to."

Public employee unions say Rhode Island is reneging on promises to workers.

"What they did was illegal," said Bob Walsh, executive director of the National Education Association Rhode Island. "We're deep into a real assault on labor. It worries me that people who purport themselves as Democrats do this."

The court case foreshadows likely battles elsewhere as states grapple with their own pension problems. In the past two years, 10 states suspended or cut retiree pension increases; 13 states now offer hybrid retirement plants that combine pensions with 401(k)-like plans.

"Forty-three states from 2009 to 2011 did something, but in many cases something was not enough," said David Draine, a researcher who tracks pension changes at the Pew Center on the States.

States are discovering the political challenge of reining in pensions is only one step in a battle ultimately won or lost in the courts.

A plan to enroll new Louisiana state workers in a 401(k)-like retirement plan is being challenged by retirees. New Hampshire is defending a law that cuts pension benefits and increases employee contributions.

California Gov. Jerry Brown last month approved higher retirement ages and contribution rates for some state workers and a $132,000 cap on annual pension payouts. The state's two main pension funds — the California Public Employees' Retirement System and the California State Teachers' Retirement System — are underfunded by $165 billion.

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