Rhode Island implements tough PERS reforms

by John Gramlich, Stateline Staff Writer

Just before Thanksgiving, over loud union protests, Rhode Island Governor Chafee signed legislation that:

• Raises most state retirement ages to 67
• Freezes cost-of-living adjustments for retirees
• Creates hybrid 401(k)-style retirement accounts that shift more of the investment risk from the state to the worker

The changes to the Employees’ Retirement System of Rhode Island (ERSRI), the equivalent of Oregon’s PERS, were pushed through by Democrats, who control the state legislature by a 5-to-1 margin and traditionally have depended on union support to win their elections.

PROVIDENCE, Rhode Island — Michael Downey, a plumber at the University of Rhode Island and the president of this state’s largest public employee union, considers Republican Governor Scott Walker of Wisconsin the face of the anti-labor movement he sees taking hold in state capitals around the country.

But Downey thinks his own governor, Lincoln Chafee, runs a close second.

“As much as I despise the likes of a Governor Walker,” Downey told Stateline in his office a short drive from the state capitol this week, “I have a very difficult time looking at Governor Chafee.”

Downey’s perspective may seem unusual, given that Chafee is a political independent who backed Barack Obama for president in 2008 and won the governorship with strong labor support last year on a platform that called for tax increases. But that was before tiny Rhode Island approved the biggest public pension cutbacks in the nation.

Just before Thanksgiving, over loud union protests, Chafee signed legislation that raises most state retirement ages to 67, freezes cost-of-living adjustments for retirees, and creates hybrid 401(k)-style retirement accounts that shift more of the investment risk from the state to the worker. Taken together, the moves add up to a sea change for the Ocean State, which has long had a woefully underfunded pension system and was on track to see general fund contributions to the system skyrocket in coming years absent significant action.

Many of the workers affected by the changes feel betrayed, saying the state broke basic employment promises. Downey likens the new rules to a homeowner being told, at the moment he pays off a 30-year mortgage, that 10 more years of payments are required.

But what has added insult to injury for public workers is that the pension changes did not come solely from the Chafee administration. They were pushed through by Democrats, who control the state legislature by a 5-to-1 margin and traditionally have depended on union support to win their elections.

“They’re not acting like Democrats,” Downey says. “I was always of the belief that politicians that call themselves Democrats, in general, care about working people and the issues that face them.”

An independent streak

National media have latched onto the political counter-narrative of the Rhode Island pension vote. The conservative editorial board of The Wall Street Journal called it a “Democrat bites union story.”

But while Democrats did defy their base by voting for a comprehensive pension overhaul — Senate President M. Teresa Paiva Weed says it was the toughest vote of her nearly two decades in office — the truth is more nuanced than Democrats suddenly turning their backs on their supporters.

For one thing, Rhode Island Democrats have been chipping away at retirement benefits for years. In 2009, they made substantial cuts to cost-of-living adjustments, a move that also infuriated unions. Earlier this year, lawmakers passed a first-in-the-nation law guaranteeing that bondholders — rather than public retirees or taxpayers — have the first right to tax dollars if a municipality goes bankrupt.

If anything, some observers say, the notion that Rhode Island Democrats are beholden to unions may need to be revised in light of the new fiscal times. “Ideology is bumping up against economic reality in Rhode Island,” says Steve Frias, the acting chairman of the state Republican Party.

There is also the fact that Rhode Island may not be as deep-blue as commonly imagined. Independents outnumber both Democrats and Republicans, a fact underscored by the election of Chafee, who became the first independent elected governor in any state since Jesse Ventura won an upset victory in Minnesota in 1998. Conservative Democrats, meanwhile, are common enough that earlier this year, Rhode Island became the first Democratic-led state to require voters to show photo identification at the polls. Similar legislation has been at the top of the conservative Republican agenda in Wisconsin and elsewhere.

“The bottom line,” says University of Rhode Island political science professor Maureen Moakley, “is that the boundaries of parties are completely frayed right now.”

The right moment

By far the most gravity-defying decision, however, was the overhaul of public employee pensions. And the simple reason for it was the perilous state of Rhode Island’s pension system, along with a new political climate in which leaders were determined to do something about it.

Before calling a special legislative session to address the pension problem in November, Rhode Island was staring at an unfunded liability of $7.3 billion, one of the largest in the nation on a per-capita basis. New estimates caused the liability to grow by $2.4 billion this year alone, giving lawmakers a form of sticker shock.

Rhode Island was hit unusually hard by the recession, and the prospect of making deep program cuts to education, public safety and transportation — cuts that could result in public worker layoffs — became an unattractive alternative to changing the pension rules. “The reality was that the (pension) numbers are growing so large that you’re having a direct negative impact on the availability of funds for other, necessary programs,” House Speaker Gordon Fox says.

Many union members sought tax increases as a way for the state to keep its pension promises, but the sales tax hike proposed by Chafee on the campaign trail went nowhere in the legislature. Part of the reason for the legislature’s no-tax position, says Paiva Weed, is that she and Fox “both are tired of being in the last five of the (business) rankings that come out year after year.”

Psychological factors also played a role. The European debt crisis served as a backdrop to the pension debate, and there were reminders closer to home, too. A bankruptcy declaration by the city of Central Falls, Rhode Island —  where public-sector retirees have seen their pensions evaporate — crystallized the human consequences of the pension problem for many state lawmakers, even though the Central Falls crisis is entirely separate from the woes facing the state retirement system.

In an interview with Stateline in his capitol office on Tuesday (December 6), Chafee said “unions hated when we waved the Central Falls flag.” But the governor said the city’s problems were a reminder to everyone of how “real” the pension crisis has become.

New determination

In addition to Chafee, new political faces pushed the pension overhaul to final passage. More than anyone, it was General Treasurer Gina Raimondo, a Democrat who collected more votes than any other statewide candidate in the last election cycle, who made pensions her singular focus of attention this year. For most of the year, Raimondo met with stakeholders around the state, urging them to see that the solvency of the entire pension system would be at risk if lawmakers did not make broad changes quickly.

Fox, the House speaker who took over the top leadership role in 2010, and Senate President Paiva Weed delivered their chambers and agreed to a special session in which the pension overhaul would be the one and only subject under discussion. “That was really the best decision the legislative leaders made,” Chafee says. “That was important in our success. No diversions, other issues, no horse-trading for votes…complete focus on one issue.”

Chafee, meanwhile, incurred the wrath of labor by backing off his earlier vow to unions that pension changes would be likely to affect new hires only. He says he changed his position after new estimates showed the pension problem was far greater than assumed, and while he says he did include labor representatives in negotiations and prepared them for some of the changes that will be coming — such as a hybrid pension system that will include elements of 401(k)-style plans — “I still understand why the unions are calling me out.”

Richard Licht, director of the Rhode Island Department of Administration, said at a recent conference in Massachusetts that the four leaders — Chafee, Fox, Paiva Weed and Raimondo — were each essential to the pension overhaul’s passage. “If you take any of them out,” Licht said, “we wouldn’t have been successful.”

‘Tipping point’ for labor influence?

The political impact of the pension law remains to be seen. In the past, Democrats who voted against major union-backed bills could expect to find themselves up against a labor-endorsed primary challenger, a major threat in a state where Democratic primary turnout is minimal and unions can decide the winner.

Unions certainly are upset enough to mobilize their members. In interviews, public workers here echoed many of the themes voiced by the Occupy Providence protesters who have camped out for weeks in a park a few blocks from the State House — asking why, for instance, public workers and not the rich are being asked to make sacrifices.

But labor is working from a much weaker position now. While every public worker union in Rhode Island opposed this year’s pension overhaul, there is also some dissension in the ranks. Younger workers, in particular, are less concerned with reduced benefits for existing retirees than they are with keeping the overall pension system solvent until they themselves retire. Current retirees, on the other hand, must deal with the real possibility that they will not see cost-of-living adjustments for the rest of their lives. The split is evident in the way unions are reacting to the pension law.

Rather than threatening primary challenges against those who voted in favor of the changes, union representatives are taking a wait-and-see approach, hoping to use next year’s legislative session as a way to negotiate changes to the measure. They acknowledge it is an uphill battle, and both legislative leaders, Fox and Paiva Weed, told Stateline flatly that the law will not be open to negotiation in the coming session.

Even if unions do go after those who voted for the measure, it will have to be a selective approach, simply because there are so many potential targets. Of the 94 Democrats in the Rhode Island House and Senate, 77 voted for the bill — including several who had been hand-picked by labor unions to defeat incumbents in primary battles during the last election cycle.

“I certainly will not be voting for people that stripped me of a pension I paid for. I won’t be,” Downey says. But he adds with a note of resignation: “I hope there’s a choice.”

Stateline staff writer Stephen C. Fehr contributed to this report.

— Contact John Gramlich at [email protected]

Stateline.org is a nonpartisan, nonprofit news service of the Pew Center on the States that reports and analyzes trends in state policy.