Rhode Island Makes Reform Happen
Two years ago, when Gina Raimondo was deciding to run for Rhode Island general treasurer, she saw a newspaper article about budget cuts affecting libraries in Providence and Cranston and bus service on nights and weekends.
It hit a nerve for Raimondo, worried that her home state’s growing pension commitments would crowd out money for such vital services.
“Essentially, the longer we delayed fixing pensions, the harder it would be for the state to provide these services. The reality was that the system was at a breaking point,” Raimondo said in a lengthy interview.
Raimondo, a Democrat, won election in 2010, and Lincoln Chafee, a former moderate Republican U.S. senator, became an independent governor.
They took office in January in the nation’s smallest state — which had one of its biggest unfunded pension problems, with an unfunded pension liability estimated at $7.3 billion, according to Washington think tank the Pew Center on the States, up 47% from $4.7 billion in 2009.
Disregarding skeptics who said they were stepping on a political third rail, the two set out to overhaul Rhode Island’s burdensome pension system.
“People said you can’t touch benefits. They said the unions were too strong, it was a political taboo, don’t touch it,” Raimondo said. “People were always shooting for a fix, for next year’s budget. We said not next year. We want retirement security for the long term. And as treasurer, I was not going to go away for a while.”
The far-reaching package that passed last month creates a hybrid plan merging conventional public defined-benefit pension plans with 401(k)-style plans.
It also includes a suspension of cost-of-living adjustment increases for retirees and raises the retirement age for employees not yet eligible for retirement. The new program will take effect July 1.
Rhode Island expects to reduce its unfunded pension liability to $4.3 billion, a 41% reduction, and raise the funding level for its defined benefit plan to 59.8% from 48.4%.
The plans are expected to achieve 80% funding in fiscal 2032 for state employees and fiscal 2030 for teachers. The Pew Center considers 80% a suitable benchmark for pension funding.
While some other states have implemented hybrid plans, Rhode Island’s would be the first to affect current employees, according to Pew.
Rhode Island generated national headlines.
“States tend to look at what other states do,” said Pew analyst David Draine, noting that unions may challenge provisions of the law in court.
“Certainly, the state would not have gone forward had it not felt confident in its position,” he said.
Rating agencies reacted favorably. “So far, it’s been positive,” Raimondo said.
Fitch Ratings called the new law “the most comprehensive measure undertaken by any of the states in recent years,” while Moody’s Investors Service termed it a credit positive. Standard & Poor’s said passage of the bill “appears to augur well for the state’s liability profile and we expect that it will also alleviate future fiscal pressures related to pension benefits.”
The rating agencies expect no immediate rating changes as a result of the legislation, though Raimondo was expecting to meet with them this month.
Moody’s rates Rhode Island’s general obligation bonds Aa2, while Fitch and Standard & Poor’s each assign a AA.
“I think the key component was education,” Raimondo said. “We really kept our focus on the problem. We concentrated on math, not politics, but realizing that real people’s lives were at the end of every number.”
Rhode Island’s approach probably worked in its favor, according to Jonathan Henes, a restructuring partner at Kirkland & Ellis LLP in New York.
“Whether they have stepped on a third rail will be determined when they run for re-election, but the way Rhode Island is tackling the problem does not appear to be political,” Henes said.
“It’s not as if a Republican governor got elected and his opponent was a union-backed Democrat, and the Republican was saying, 'Now it’s time for payback against the unions,’ ” he said.
“In Wisconsin, by contrast, when Gov. [Scott] Walker was elected, he said he’d go after the unions. He had the best of intentions, but he came off the wrong way,” Henes added.
“It was never 'us versus them,’ ” Raimondo said.
Raimondo grew up in Smithfield, outside Providence. While she was in grade school, her father lost his job when Bulova shuttered its watch factory. For income, he juggled part-time jobs while collecting a greatly reduced pension.
Throughout 2011, Raimondo spoke at assembly halls statewide, often before angry union members and pensioners.
“I actually enjoyed it,” she said. “I learned a lot. They deserved an opportunity to be heard. And the reform package ultimately became better because we did listen. There were so many personal stories about human issues.”
Raimondo, whose education includes LaSalle Academy, Harvard University, Yale Law School, and a Rhodes scholarship at Oxford University, co-founded private-equity firm Point Judith Capital, where she worked for a decade before her election. She drew on her background while campaigning on a theme of better transparency.
“As a former investor, I always believed in providing a complete picture,” she said. “One of the things we’ve done is create an investor relations portal. We’ve beefed up our disclosure and provided better training for staff involved with Rhode Island bond offerings.”
Raimondo acknowledged in February that the Securities and Exchange Commission had opened an investigation into bond deals in the Ocean State.
“We had planned to increase our disclosure, regardless of what the SEC was going to do,” said Raimondo, who has not been at liberty to speak about particulars of the SEC investigation.
Overall, Rhode Island, despite praise for its pension package, is still struggling. Central Falls is under receivership and in bankruptcy, though the city of only 19,000 people, which reported an $80 million pension shortfall when it filed under Chapter 9 on Aug. 1, appears to have reached an accord over its two pension plans.
Since that city’s filing, several municipalities have received downgrades.
They include East Providence, which has received two downgrades from Moody’s in five months, dropping its GO rating to junk status — Ba1 — from A1. Its most recent downgrade, three notches, came Monday. East Providence is also under a state-appointed overseer, Stephen Bannon.
Henes said Rhode Island made the right moves with Central Falls, including the passage of a law designed to protect bond investors. It required municipalities to guarantee lenders first rights to their property taxes and general revenue, should they file for bankruptcy.
Henes added that Rhode Island’s size, which many see as a liability, worked in its favor. Smallest in area among the United States, Rhode Island has just over 1 million residents.
“Rhode Island is in a better position than a California,” Henes said. “With a big economy — California, the U.S., Europe — you can hide a lot of things and kick a can down the road.
“Rhode Island couldn’t kick the can down the road; they had reached the end of the road. They were falling off the end of a cliff.”
Meanwhile, much work remains in implementing pension changes. Raimondo’s office said Monday that in conjunction with the State Investment Commission, it seeks proposals for a service provider to implement and administer the new defined contribution program.
The new law only applies to the state-run pension systems.
According to a report that interim auditor general Dennis Hoyle issued in September, two-thirds of the 36 locally administered pension plans in 24 communities are at risk.
Raimondo, again stressing education, said that while the new law does not pertain to localities, her office is ready to advise, if necessary.
“If Rhode Island can help, or I can help, we’re here,” she said. “We’re hopeful that what we did can serve as a model.”