An option for local pension plans
It’s hard to believe given the small size of our state, but Rhode Island has 150 municipal pension plans. These plans provide retirement security for the hard-working municipal employees who devote their careers to serving our local communities. These employees, and the taxpayers they serve, deserve to have pension plans that are healthy and sustainable.
About three quarters of the state’s local pension plans are part of the Municipal Employees’ Retirement System (MERS), which was established in 1957 to give municipalities the option to have their pension plans managed by the state treasury. A municipal plan that joins MERS receives the benefits of scale and professional management, which they might not be able to afford on their own. MERS also enforces fiscal responsibility, with a uniform benefit structure and a requirement that all communities make their full-required pension contributions or risk losing state aid.
The result is that municipal pension plans that have joined MERS are doing well. Pension plans in MERS have a healthy 83 percent overall funding status. Benefiting from the scale and efficiencies that come with being a part of the $8 billion state pension system, municipal pension plans in MERS pay only 0.1 percent of their fund balance in administrative overhead every year.
In contrast, the 34 municipal plans that have not joined MERS carry a combined unfunded liability of $2.4 billion – roughly 8 times the combined unfunded liability of the 116 plans in the MERS system.
Take, for instance, two neighboring towns: East Greenwich and West Warwick. East Greenwich’s public employees’ pension plan is in the state’s MERS system and is 117 percent funded. They are required to make the full contribution every year, and benefit from the low-cost management of the state’s system.
West Warwick, on the other hand, manages its pension system locally and are in dramatically different shape. They are currently just 20 percent funded and are facing a $125 million shortfall on benefits that have already been earned. In fiscal year 2015, West Warwick’s investment expenses were 4.6 times higher than what East Greenwich paid through the state system and lost 3.6 percent on their investments.
If left unaddressed, the consequences of Rhode Island’s locally-managed pension problems could be devastating. The rising costs of these plans are already hampering the ability of cities and towns to invest in education, fix roads and keep residents safe. The tenuous financial condition of many locally-managed pension plans also places the retirement security of municipal employees in jeopardy.
Unfortunately, many communities with critically funded local pension plans are unable to join the state system because the rules that govern entrance into the MERS system are unnecessarily rigid. For example, communities entering MERS are currently required to adopt a 20-year schedule for paying off their pension debts, which makes sense for a well-funded plan, but can be an unrealistically short time-period for a critically funded plan.
This year, I have developed the “Healthy Local Pensions Act” to assist struggling municipal pension plans by allowing them to access the professional management and scale advantages of MERS, while gradually implementing certain requirements of the MERS system. This plan provides short-term financial flexibility to communities along with a path to long-term pension sustainability.
Better performance and lower fees means more security for plan members and retirees, and less cost for taxpayers. Lower investment fees also mean that more of the members’ money stays in Rhode Island.
For many communities, joining MERS has been an important step toward ensuring that municipal employees who have spent their career in public service can benefit from the retirement resources that are available in Rhode Island.
In West Warwick, and other communities throughout the state, the town and members of the pension plan should have the opportunity to consider joining MERS and to take advantage of every tool available to bring its critically-funded plan back to a healthy funding status. Common-sense solutions like the Healthy Local Pensions Act will be an important step in our state’s continued progress toward stronger financial health.
Seth Magaziner is General Treasurer of Rhode Island.