(Reuters) - Last year, Rhode Island enacted what experts said was the most far-reaching, sophisticated public pension reform in the country to date, becoming a model for other states and cities seeking to reshape their own ballooning pension systems.
Yet the smallest state in the United States can’t say it has won the fight: the reform didn’t apply to dozens of independent local pension plans, many of which are sorely underfunded and are stuck fending mostly for themselves.
Whether towns have acted urgently on pension reform, however, is another matter.
At a heated town council meeting in West Warwick in June, the biggest item on the agenda was a long-running squabble with the school board about whether to hand over a few million dollars to spare cuts in sports and music programs.
Sean Henseler, a parent and coach, was trying to get the message out that the real demon on the fiscal horizon was the town’s nearly $235 million of unfunded liabilities for pension and other retirement benefits.
“That’s the iceberg they’ve already hit. The Titanic is going down,” Henseler said after the meeting. “These guys are paying lawyers to rearrange the deck chairs.”
Debate about public pensions is playing out across the United States as state and local governments - many of which already are struggling under bare-bones budgets in the post-recession era - face retirement systems that are increasingly burdensome or even unsustainable.
The overhauls, which could reshape municipal governments for years to come, are fractured in a nation with thousands of funds and a jumble of different laws at play.
Rhode Island is not the only state that has a raft of independent local pension plans.
Pennsylvania, for example, has about 3,200 totally independent local pension plans, a quarter of all public pension plans in the country.
“These smaller local plans tend to be less efficient and cost more and tend to have less oversight than the larger statewide plans,” said Keith Brainard, research director for the National Association of State Retirement Administrators.
“And when you’ve got individual small employers trying to navigate investment markets and taking on all of the actuarial risk on their own, they’re likely to experience higher costs, lower returns and higher volatility,” he said.
Reform in Rhode Island, which took effect July 1, suspended cost-of-living adjustments, raised the retirement age, and moved state employees onto a hybrid pension plan of defined benefits and mandatory defined contributions.
The state has four main pension funds covering about 66,000 teachers, judges, police and other state workers.
Rhode Island also has 36 separate local pension plans administered by 24 municipalities for firefighters, police and city employees. More than a dozen were funded at less than 34 percent in fiscal 2010.
Last September, the state’s auditor general, Dennis Hoyle, reported that locally administered pension plans were collectively $2.1 billion short in fiscal year 2010, the most current data available for all the plans.
That amounts to a liability of $144,000 for each of the 14,600 members of the pension plan, according to the U.S. Census Bureau.
The average funded ratio of local plans was 40.3 percent. Funding for other locally administered post-employment benefits, mostly for healthcare, was an additional $3.5 billion short of the mark.
Fixing the problem may be tough going for cities and towns, which have suffered cuts in state aid and lowered revenue.
In nine towns, pensions and other retirement benefit obligations - if paid in full - would have consumed at least 25 percent of their property tax levy in fiscal 2010. In Woonsocket, the liabilities would have eaten up 61 percent.
State budget commissions are already overseeing finances of Woonsocket and East Providence. West Warwick is one of three other communities that have qualified but have yet to ask for a budget commission. Central Falls went bankrupt last year - in large part because of unmanageable bills for its nearly insolvent pension plans.
“This is a crisis that’s coming,” Governor Lincoln Chafee told Reuters recently. “There’s going to be state intervention.”
The changes from last year’s state pension reform - which labor unions are challenging in a lawsuit - did provide some help for towns and cities, since they pay into the state pension fund for teachers.
State Treasurer Gina Raimondo, a former venture capitalist who took office in January 2011, said the reform could save Rhode Island’s cities and towns about $100 million in this fiscal year and $1 billion over the next 20 years.
“If we hadn’t had the reform, the bill to the taxpayer beginning fiscal year 2013 would have been almost double,” Raimondo told Reuters.
Facing the possibility it could run out of money, Providence, the state’s biggest city and the capital, enacted pension reforms that freeze cost-of-living increases for 10 years.
West Warwick is among cities that are just beginning to address the problem of underfunded pensions.
“The problems go back 10 years. The current town council is the first in some time that’s actually tried to make contributions,” said Zak Asatrian, West Warwick’s pension board chairman.
For nine of the past 13 years, the town of about 29,0000 paid less than 50 percent of what it owed, according to data presented by state officials at a May public hearing. If nothing changes, the fund will run dry by fiscal year 2017, they said.
West Warwick is making efforts to cut costs. It has privatized trash collection and is bargaining with unions for concessions.
But spending plans die hard. A week after the raucous public meeting, attended by nearly a thousand people, town council members restored about $4 million it planned to cut from the schools.
The city will also pay $5 million toward its pension plan in fiscal year 2013 - five times more than last year, but still just about half of the required contribution.
“We could level this thing off and stop the bleeding in 2013, but we have a long way to go,” he said.
Reporting By Hilary Russ in West Warwick, Rhode Island, and New York; Editing by Tiziana Barghini and Leslie Adler