Reason Foundation

Reason Foundation

Pension Reform Case Study: Rhode Island

Rhode Island's reform effort offers lessons for other states and municipalities facing significant unfunded pension liabilities

Anthony Randazzo
January 15, 2014

In 2011, the Rhode Island General Assembly passed a major pension-reform bill that suspended cost-of-living-adjustments for retirees, increased the retirement age and introduced a hybrid defined-benefit/defined-contribution funding system.

Rhode Island has a history of underfunding its pension system. As early as 1993, the net present value of the State Employees’ pension fund represented only about 72 percent of the expected liabilities. The Teachers’ fund was in worse shape. Although funding levels improved through the 1990s, they rapidly deteriorated after 2000.

Some modest attempts were made by the General Assembly to improve the situation in the mid-2000s, such as raising state employees’ minimum retirement age. While these changes slowed the decline of Rhode Island’s pension fund stability, they did not adequately address the unfunded liabilities already built into the system.

In 2011, State Treasurer Gina Raimondo commissioned an independent actuarial assessment of the pension system because of the threat it posed to the state’s finances. This assessment showed an unfunded pension liability of $6.8 billion, implying that the system was less than 50 percent funded relative to its obligations.

Rhode Island Governor Lincoln Chafee and Treasurer Raimondo worked with leaders in the state legislature to highlight the problem and make the case for reform. They also engaged the state’s various communities and key stakeholders before making detailed proposed reforms. The subsequent Rhode Island Retirement Security Act of 2011 (RIRSA) combined conventional methods for adjusting labor contracts with some innovative approaches.

While Rhode Island still faces challenges in the wake of its historic reform effort, the reform effort offers lessons for other states and municipalities facing significant unfunded pension liabilities:

It remains to be seen whether the reform effort will achieve the savings projected under the RIRSA plan. But Rhode Island appears to have made significant strides in pension reform as long as its future leaders do not return to past practices, and its experience offers an example for other states and municipalities to learn from.

Anthony Randazzo is Director of Economic Research

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