Lawmakers want modest pension adjustments to help retirees. Not so fast, general treasurer says

Rhode Island General Treasurer James Diossa has cautioned lawmakers against tinkering with the 2012 pension overhaul to appease state retirees, saying the state's bond rating is on the line. (Michael Salerno/Rhode Island Current)

It didn’t take long for Rhode Island General Treasurer James Diossa to wave a cautionary flag on lawmakers’ proposed changes to the state pension system.

Less than one hour after the House Committee on Finance approved a revised fiscal 2025 budget Friday night, Diossa took to X to respond to recommended revisions in retiree benefits and pension funding ratios. While Diossa stopped short of opposing the changes, he highlighted the debt and increased liability for the beleaguered pension fund, which could hurt the state’s borrowing capacity in the future.

“In discussions with the state’s fiscal advisor and actuary my office has been cautioned that increases in liability, combined with additional debt service, could potentially have an impact on the state’s bond rating in the future,” Diossa said in a statement on X.

Diossa in an interview Monday night said he supported lawmakers’ proposals, but wanted to make sure they were aware of the long-term impact on the state’s financial stability.

“If we are going to adopt these changes, we have to fund them every year,” Diossa said. “That is where I am most concerned, the long-term of it. We can fund it next year, and the year after, but we have to stay the course.”

The revised $13.9 billion budget proposal unveiled and given first passage by a panel of House lawmakers Friday includes a nod to retired state workers and teachers , whose cost-of-living (COLA) increases were abruptly halted in 2012. The pension overhaul proved unpopular among retirees and active workers paying into the state pension system, yet has shown effectiveness in shoring up the troubled pension system. Over the last 12 years since reforms were enacted, the taxpayer burden has been slashed in half while the “dangerously unfunded” liability has shrunk and the state’s credit rating has improved.

The goal of the 2012 reforms was to reach 80% funding — considered a sign of relative stability —  at which time suspended COLAs would be brought back to life. As of June 30, 2023, the system was 62.8% funded, with analysts projecting the state system would reach the 80% benchmark by 2030 under existing policies.

Yet lawmakers want to help struggling retirees now, offering a scaled-down version of full COLA reinstatement, which if applied retroactively, would come with a $169 million price tag, according to a February report by a panel tasked with studying the topic .

Instead, the revised fiscal 2025 budget proposal offers COLAs to the 19,000 retirees who stopped working before the 2012 reforms. It also reduces the target funding ratio at which time COLAs would be universally revived from 80% funding to 75% funding. When the pension fund would reach 75% funding was not specified.

Other, more minor changes include tweaking how benefits are calculated. The annual retirement benefits would reflect the average of the top three years of earnings instead of five. The pay retired teachers can earn without losing benefits would increase from $18,000 a year to $25,000. Additionally, the same retirement benefits available for local public safety workers would be extended to state public safety employees.

Lawmakers’ budget plan also preserves Gov. Dan McKee’s proposal to raise the exemption on taxable retirement income from $20,000 to $50,000.

Together, these amendments come with a $27.5 million state cost in fiscal 2025, with $20.6 million coming from the state’s general revenues under the revised budget, according to House fiscal staff analysis .

There’s also a $15 million required local contribution from cities and towns that participate in the state pension system.

Most alarming for Diossa is the projected $417 million increase in the pension shortfall, which cuts the funding ratio by 2%, according to actuarial figures shared in his social media post.

The pension liability remains a primary source of financial weakness in state credit ratings, as noted in the February report issued by the state’s Pension Advisory Working Group. The report did not include a position for or against any changes to the state pension system.

“If we don’t fund these benefit changes, this could have an impact on our bond rating,” Diossa said Monday. “The importance of having a strong bond rating, which we have had for many years, is it gives us the opportunity to go out for projects at much cheaper borrowing costs.”

More sweeping pension changes could be added to the fiscal 2025 budget when the full House of Representatives takes up the spending plan on June 7. Diossa said he had no objections as long as lawmakers also include the funding to pay for it.

Working group co-chairs George Nee, president of AFL-CIO, and Michael DiBiase, president and CEO of the Rhode Island Public Expenditure Council, could not immediately be reached for comment on Monday.

McKee’s office did not immediately respond to inquiries for comment Monday.

Updated to include comments from General Treasurer James Diossa.

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