A Tale of Two States: MICHIGAN vs ILLINOIS, lessons in pension reform
As part of our Center’s special pension Task Force, Jonathan Williams teamed up with RI Representative Jon D. Brien to publish this compelling piece that discusses how different pension reform decisions by Michigan and Illinois should make clear the path Rhode Island should take as our General Assembly considers the historic pension reform bill before it.
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Pension Reform Key for Rhode Island’s Future
By Representative Jon D. Brien and Jonathan Williams
As legendary Supreme Court Justice Louis Brandeis once wrote, we have 50 laboratories of democracy across the states. From these case studies, we can analyze which policies succeed, and which policies fail. Without a doubt, the largest threat to our 50 laboratories across the United States is rapidly mounting unfunded pension liabilities for government workers.
With an estimated unfunded liability ranging from $6.8 billion to more than $15 billion (depending on your actuarial assumptions), Rhode Island faces a huge threat to its financial sustainability. If you assume an unfunded pension liability of roughly $15 billion, which is the estimate that uses generally accepted accounting principles (GAAP) from the private sector, every man, woman and child in Rhode Island currently owes $14,256. This is a reality that is not negotiable.
Realizing that the current pension program is unsustainable, Governor Lincoln Chafee and State Treasurer Gina Raimondo have recently proposed the bipartisan Rhode Island Retirement Security Act of 2011(RIRSA).While some special interest groups may not consider the current pension situation in Rhode Island to be a true crisis, they should look no further than Central Falls, RI, which recently declared bankruptcy, and as a result, cut public pension plans by nearly 50 percent.
Other states have taken fundamentally different approaches to reforming their public pension programs. Michigan directly tackled its pension problem in 1997 by replacing the traditional “defined-benefit” pension plan with a 401(k)-style “defined-contribution” retirement plan for new state employees. The Michigan reforms have been immensely successful. According to a recent report from the Mackinac Center for Public Policy, Michigan’s 1997 pension reform has saved state taxpayers between $2.3 and $4.3 billion in unfunded liabilities. Of course, Michigan isn’t out of the woods yet, but at least their problem has been addressed and steps have been taken towards fundamental reform.
Michigan is not alone. Across the United States, elected officials are quickly realizing that full reliance on the defined benefit pension model for government workers is not sustainable. In 2010, Utah also took the approach of RIRSA, offering a hybrid plan and offering 401k-type flexible retirement accounts for new workers.
Unfortunately, the story in Illinois is not nearly as encouraging. In the last 10 years, Illinois legislators have continuously ignored the pension burden in their state—so much so that Illinois is presently in the worst shape in the nation, with an estimated unfunded liability of $85.6 billion. But that’s not all—according to the Illinois Policy Institute this number doesn’t include the $17.8 billion in pension obligation bond payments that are owed, which puts the total Illinois pension burden at $102.8 billion.
The beauty of the American experiment is that we have our 50 laboratories of democracy, where various policies have succeeded, while others have failed. Rhode Island residents should look not to the failed policies in Illinois, but rather to Michigan’s successful policy reforms, for proof that pension reform is possible and can produce positive results.
Not only will pension reform save Rhode Island taxpayers billions of dollars, but it will provide public workers with the security that their money will be there when they retire. Fundamental pension reform is a win-win for taxpayers and public employees alike. The choice is not between Republican versus Democrat, or Left versus Right. The choice facing Rhode Island is up versus down for economic growth and sustainability.
Representative Jon D. Brien (Democrat – District 50, Woonsocket), Chairs the House Municipal Government Committee and House Commission to Study Municipal Financial Integrity
Jonathan Williams is a member of the RI Center for Freedom’s special pension task force, is a co-author of ‘Rich States, Poor States’ and serves as Director of the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council, a non-partisan membership association of state legislators.