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Commentary By Josh Barro

Democrat Raimondo's Rhode Island Reforms Are Remarkable

Governance, Cities, Economics Tax & Budget

Pensions are on the political agenda in nearly every state. The stock market downturn of 2008 and 2009 battered pension funds, exposed the true cost of benefit sweeteners awarded during the tech and housing booms, and left state officials searching for dollars to pour into pension funds. But in most states, reform has been a bust, with meaningful savings put off for years or decades.

However, one small state was a big exception -- Rhode Island. General Treasurer Gina Raimondo led Rhode Island to enact the boldest pension reform of any state in recent years. For this, she will receive the Manhattan Institute’s Urban Innovator award this week.

This award recognizes state and local officials whose innovative approaches improve the efficacy of government and the prosperity of cities. Past winners have included Michelle Rhee, Mitch Daniels, Jeb Bush and Anthony Williams. While we have usually honored mayors and governors, Raimondo will be the first down-ballot statewide official to receive the award, and for good reason.

Before reform, Rhode Island had one of the largest pension funding gaps in the country, relative to its size. Absent reform, the state would see required pension contributions double in two years. While other states could kick the can down the road, Rhode Island had no choice but to clean up the mess.

Raimondo put forward a plan that would get the state’s pension costs under control and reduce the risk that further funding gaps would appear in the future. In order to do this, her plan had to differ in a few ways from those seen in most states.

First, reforms apply to future earnings by existing employees, not just to new workers. Unlike in states that have limited pension reforms to new or non-vested employees, this means that Rhode Island will start realizing substantial savings immediately because of the lower cost of the new system.

Second, investment risks in the reformed pension plan will be shared between employees and the government. In a traditional defined-benefit plan, employee benefits are fixed and taxpayers bear all investment risk, which is how states have ended up with such large unfunded liabilities.

In Rhode Island, new pension benefits will be split between a defined-benefit plan and a 401(k). Additionally, the defined benefit will include a cost of living adjustment mechanism that exposes workers to a portion of the pension fund’s over- or underperformance.

It is still possible that Rhode Island will experience funding gaps in this new system when the stock market performs poorly, but they will tend to be more manageable relative to the size of the state’s economy.

Finally, the state has frozen the cost of living adjustment offered to retirees in its current defined-benefit plan. This is the most controversial aspect of the reform -- it amounts to rescinding a benefit previously awarded -- but it reduces the unfunded liability by billions of dollars and was embraced by lawmakers looking for breathing room in the budget.

Raimondo is a Democrat, and so are more than 80 percent of the members of Rhode Island’s legislature. But as the treasurer is fond of saying, pension reform isn’t a question of ideology, but of math.

Without real reform, Rhode Island’s annual pension costs would soar by hundreds of millions of dollars a year -- a large figure in a state of one million residents. Raimondo emphasized that the ever-rising demands of the pension system would mean less money available for education and municipal services, and a deterioration in the effectiveness of government.

Ultimately, the reforms won the backing of most of Rhode Island’s top officials, including the governor and legislative leadership. The legislature overwhelmingly passed the package with only minor changes in November. A December poll from Brown University found 60 percent support for the new law.

Rhode Island isn’t quite done -- while these reforms have put the statewide pension systems on sound footing, it has many troubled local pension systems that will require attention in 2012. But the Ocean State has provided a road map for politically and financially viable pension reform that other states, especially blue states, should consider copying.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner