Rhode Island's Hybrid Pension Plan Saves $3B

Rhode Island ERS
The Need and Sustainability of the Hybrid Plan
Alex Link
4/25/2013
1. I have worked very hard this semester in an effort to write a high quality research
paper. Because this paper represents my best work, I believe that I could show it to potential
employers and it would help me in the interview process.
YES
2. Professor Clark has my permission to share this paper with leaders of the North Carolina State
Retirement system.
YES

Link 1
The current structure of teacher and state employee retirement systems in the United
States is generally not sustainable. Teacher pension plans alone are not sufficiently funded in
forty-one states, and the total amount of unfunded liabilities of all state teacher pensions is
estimated to be nearly $390 billion.1 This, combined with an overall funding gap of nearly $1.5
trillion dollars in total state retirement funding, has many states scrambling to restructure their
retirement plans to avoid drastically reducing the benefits paid to their beneficiaries.2 One such
state that has suffered drastically over the past couple of years is Rhode Island. With only 49% of
its $13.4 billion pension liability funded in fiscal 2010, Rhode Island has been struggling
severely to reorganize their plan to address the needs of its retirees. By instituting a bundle of
reforms, which became active in July of 2012, Rhode Island hopes to greatly reduce its unfunded
liabilities by an estimated $3 billion dollars in the coming years.3
The Employees’ Retirement System of Rhode Island (ERSRI) provides retirement,
survivor and disability benefits to members deemed eligible by Titles 16, 28, 36, 42 and 45 of the
Rhode Island General Laws. As a condition of their employment, the following employees are
required to become members of Rhode Island’s ERS: State employees, public school teachers,
correctional officers, registered nurses of behavioral healthcare, developmental disabilities and
hospitals, municipal employees, municipal police and fire officials, state police and all justices
and judges. All of the aforementioned employees contribute varying amounts to the ERSRI as
1 Doherty, Kathryn M. No One Benefits: How Teacher Pension Systems Are failingBoth Teachers and Taxpayers .
National Council on Teacher Quality,2012.Web. 30 Jan. 2013.
<http://www.nctq.org/p/publications/docs/nctq_pension_paper.pdf>.
2 Linn, Allison."FundingGap for State Retirement Benefits Rises to $1.4 Trillion."NBCNEWS.com. Economy Watch,
18 June 2012. Web. 30 Jan. 2013. <http://www.nbcnews.com/business/economywatch/funding-gap-state-
retirement-benefits-rises-1-4-trillion-834473>.
3 The WideningGap Update. Pewstates.org. The PEW CharitableTrusts.Web. 31 Jan. 2013.
<http://www.pewstates.org/uploadedFiles/PCS_Assets/2012/Pew_Pensions_Update_State_Fact_Sheets.pdf>.

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defined in the Rhode Island Retirement Security Act of 2011 (RIRSA). RIRSA modified the old
defined benefit pension plan into that of a hybrid structure which combines elements of a defined
benefit plan with that of a defined contribution plan. Beginning on July 1, 2012, the majority of
above-mentioned employees began making obligatory pre-tax payments to the defined
contribution plan. The act also required the eligible workers’ employers to begin making
contributions to their employees’ defined contribution plan, as well as continuing to make their
annual contributions to the defined benefit plan, which is defined by the retirement system’s
actuary.
RIRSA also modified the amount of the contribution that employees are required to make
to their already existing defined benefit plan. The following table specifies the new regulations
for employees and employers for both plans.4
Employee
Type
DB Plan Contribution
Rate (Member)
DC Plan
Contribution Rate
(Member)
DC Plan
Contribution Rate
(Employer)
DB Plan Contribution
Rate
(Employer)
State 3.75% 5% 1% 23.05%
Teacher 3.75%
5% (Additional2% for
teachers without
Social Security)
teachers without
Social Security)
20.68%
Municipal
(General
Employees)
1% (No COLA)
2% (With COLA)
employees without
Social Security)
employees without
Social Security)
Various
Municipal
(Police and
Fire)
7% (No COLA)
8% (With COLA)
3% for employees
without Social
Security
3% for employees
without Social
Security
Various
BHDDH
Nurses
3.75% 5% 1% 23.05%
Correctional
Officers
8.75% None None 14.45%
Judges
12% (effective 7-1-12
for both contributing
and non-contributing
judges)
None None 27.28%
State Police 8.75% None None 14.45%
4 Employees' Retirement System of Rhode Island. An Employee's Guide to Understandingthe Rhode Island
Retirement Security Act. Jan. 2012. Web. 30 Jan. 2013.
<https://www.ersri.org/public/documentation/FINAL_RIRSAGuide_January2012.pdf>.

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The RIRSA also modified the amount of years it takes to become vested within the
retirement program. The vesting period for the defined benefit plan was reduced from ten years
of service to five years. It also laid out the guidelines on becoming vested in the defined
contributions plan. Members will always be 100 percent vested in their contributions to their
own defined contribution plan, and they will be vested in their employers’ contributions after
three years of service, including the years of service prior to the RIRSA’s commencement in July
of 2012. However, if a member terminates their employment prior to finishing three years of
service, then they forfeit their employer’s contributions. The money contributed to the defined
benefit plan is deposited into a trust fund which is created especially for members of the ERS
and their beneficiaries.5 These funds are then invested by the State Investment Commission,
which is managed by the Rhode Island State Treasurer.
The amount of money a retiree receives from their pension benefit is determined by the
number of years they have worked and contributed to the pension system. Employees in the
retirement system earn one year of service credit for each full year where they work in a position
that is a minimum of 20 hours per week. For teachers, a year of service credit is received when
they have taught for 180 days, and even those who are employed for at least half of that will
receive service credit on a proportional basis.6 Even members who change jobs between
participating employers will usually be able to count all of their contributing service credits
towards their pension benefit. However, this is only applicable if the employee did not work for
multiple participating employers simultaneously. Time worked in municipalities may also count
5 Employees' Retirement System of Rhode Island.An Employee's Guide to Understandingthe Rhode Island
Retirement Security Act. <https://www.ersri.org/public/documentation/FINAL_RIRSAGuide_January2012.pdf>.

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towards a worker’s benefits but only if the city or town is a participant in the Municipal
Employees’ Retirement System (MRS).
Due to the introduction of RIRSA, determining one’s retirement age in the state of Rhode
Island has become a much more complicated matter. The Rhode Island General Assembly
instituted a group of pension reforms in 2005 and 2009 that changed the retirement eligibility
dates for state employees and teachers by creating eligibility schedules for ERS employees.
RIRSA added even more changes to the retirement eligibility system, but the schedules created
by the earlier reforms are still taken into account. For state employees and teachers, it is
important to determine their “Article 7” date to verify when they can retire under RIRSA.
However, members must know what schedule they fall under to calculate their Article 7 date.
The following table illustrates what type of schedule a state employee or teacher would fall
under:7
Schedule Vested with 10 years of
service credit on July 1,
2005
Eligible to retire as of
September
30, 2009
Notes
A Yes Yes Eligible to retire as of
September 30, 2009 if they had
28 years of total service as of
September 30, 2009 (at any age)
OR if they had 10 years of
contributing service and were
60 years old as of September
30, 2009
B No Yes Eligible to retire as of
September 30, 2009 if they had
10 years of contributing service
and were 65 years old as of
September 30, 2009.
AB Yes No
B1 No No
B2 No No Became a member of ERSRI
after September 30, 2009.
Eligible to retire at Social
Security normal retirement age.

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As seen in the above chart, state employees and teachers who are Schedule A or B
members are eligible to retire at any time, but, due to the reform laws, those who fall under the
AB or B1 Schedule face a “downward proportional adjustment” toward an earlier retirement age.
This is based on “frozen service credit,” which is the formal term for years of service an
employee had as of September 30, 2009.8 Lastly, those who are members of the B2 Schedule are
not subject to the downward proportional adjustment, due to them being hired after September
30, 2009, and therefore having no years of service that need adjustment.
Retirement eligibility for other employee positions is more straight-forward than for state
employees and teachers. Both correctional officers and BHDDH registered nurses may retire
when they are 55 years old and have contributed services of at least 25 years. However, both
professions may retain their Article 7 eligibility date if it was prior to June 30, 2012. State police
officers are eligible to retire once they have accumulated a pension benefit equivalent to 50
percent of their whole salary, and they must retire once their benefit has been accrued to 65
percent of their entire salary. Judges in Rhode Island are faced with two options. They may retire
at age 65 after serving for 20 years, or they may retire at the age of 70 after serving for 15 years.
Finally, municipal police and fire employees are eligible to retire once they have reached the age
of 55 and have worked for a minimum of 25 years, or they may retire with a reduced benefit if
they are within five years of their eligibility date and have at least 20 years of work experience.9
Although retirement eligibility and pension benefits have been affected by RIRSA, this only

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applies to future dates. So, no matter when an employee decides to retire, the benefits they have
accumulated prior to June 30, 2012, are not affected.
Due to the introduction of RIRSA, accrual rates of pension benefits for services
contributed on or after July 1, 2012 have changed. For each year of service after July 1, 2012,
state employees, teachers, BHDDH nurses and municipal workers will earn an additional benefit
increase of one percent. Their total benefit is calculated using the following formula:
Benefit Amount = .01 x Years of Service x Average Salary of Five Highest Consecutive Years
However, one must also know their frozen service credit to calculate their service benefits prior
to July 1, 2012. The following table depicts the accrual rates for state employees, teachers and
BHDDH nurses prior to July 1, 2012.10
Schedule A
(Vested before
July 1, 2005; Eligible to
retire at Sept. 30, 2009)
Schedule B
(Vested after
July 1, 2005)
Years 1-10: 1.7% Years 1-10: 1.6%
Years 11-20: 1.9% Years 11-20: 1.8%
Years 21-34: 3% Years 21-25: 2%
Year 35: 2% Years 26-30: 2.25%
Years 31-37: 2.5%
Year 38: 2.25%
The scheduled employees (as described on page 4) accrue benefits at the rates corresponding to
their letter. Only workers who fell under the AB Schedule are subject to both rates. Through

September 30, 2009, AB members were subject to Schedule A rates and Schedule B rates from
October 1, 2009, until June 30 2012. Their formula corresponds to:
Benefit Amount = Total Benefit Accruals x Average Salary of Five Highest Consecutive Years
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Again, other positions are subject to very different regulations than state employees and
teachers. Due to the RIRSA, correctional officers and state police both earn two percent accrual
rates for each year of service, and their benefits are calculated using the average of the five
highest years of consecutive compensation. The same policies also apply to all municipal
employees, including fire and police, after July 1, 2012. Their calculation period has moved
from highest consecutive three years to highest consecutive five years, and they are now all
subject to a two percent per year accrual rate. Lastly, judges hired after July 1, 2009 can earn up
to 80 percent of the average of their highest consecutive salary over five years. Again, this only
applies to all work performed after June 30, 2012, as all benefits performed before such date are
protected by RIRSA.11
State employees and teachers are also able to retire at an earlier date but are subject to a
reduced pension benefit. Members who wish to retire earlier are allowed to if they have 20 years
of work experience and are within five years of their RIRSA retirement date. Their benefit is
calculated using the same formula as above, but that benefit is then reduced according to an
actuarial basis, which is based off of how close an employee is to their full benefit retirement
date.12 An employee may still receive their full pension if they retire early, but they must wait
until their RIRSA eligibility date to do so.

Once a member applies for retirement, they may select one of four retirement options that
they feel is best suited for them. The first possibility offered is a Service Retirement Allowance
(SRA) plan. Employees who select this strategy receive their pension benefit as calculated
Link 8
above, but all payments stop when the member dies and they are prohibited from changing their
choice once they have retired. The next plan offered is known as Option One: Joint and Survivor
Full. Those who select this option will receive a reduced monthly benefit which will be left to
their beneficiary once they die. The reduced rate is actuarially calculated primarily using the age
difference between the member and their beneficiary. Option Two: Joint and Survivor Half is
similar to Option One, except that once the ERS member dies, their beneficiary is only left with
half of their monthly benefit. Because the recipient only receives half of the pension benefit, the
reduction to an employee’s benefit is less than that of Option One. With both of the Option
plans, members have the opportunity to change their plan, provided they and their spouse have
not divorced.13 They are also not allowed to switch to the final plan, which is known as the SRA
Plus option.
The SRA Plus option, also known as the Social Security Supplemental option, increases
an employee’s pension benefit by a supplemental amount which is calculated by using a
member’s retirement age and a percentage of an estimate of the average Social Security payment
that a person might receive at the age of 62. However, those who select this option will receive a
reduced pension the month after they turn 62. The amount of the reduction is determined using
the full national average amount of Social Security payment that a person might receive at the
age of 62, not the supplemental amount that the beneficiary has been receiving. Once selected,

this option may not be changed, and this option is not available to anyone who did not have 10
years of work experience prior to July 1, 2005.14
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The plan as currently structured is aimed at helping decrease the current unfunded
liabilities for the state of Rhode Island. Although this is an extremely important issue, many
unions are already attempting to challenge the RIRSA reforms that will lead to lower pension
benefits for them in the future. The new hybrid plan makes benefits more portable for
employees, which is an essential reform in a changing world where people are constantly moving
and taking new jobs elsewhere. That, along with decreasing the vesting rate to five years, will
attract many more employees to the state. Due to the dual defined benefit and defined
contribution plan, the investment risk between workers and their employers is now shared, while
simultaneously allowing vested employees to retain their benefits accumulated before the
implementation of the lower accrual rate. These factors may prove attractive enough to convince
employees to stay and continue working in the state.
However, in their attempt to reduce the large amount of unfunded liabilities the plan does
away with benefits that appear very attractive to ERS members. There will be no more automatic
annual increases in pension benefits until the total funding level for ERS members exceeds 80
percent. This COLA will instead be limited to once every five years until the system reaches a
sufficient funding level. The retirement age for non-vested workers and all new hires has been
raised to 67 years old, which is the same age as Social Security eligibility. Although the hybrid
plan introduces a defined contribution plan to supplement the lower rates of the defined benefit
plan, many workers just see this as a decrease to the pension benefits. The newly created system

may upset many state employees and teachers, but it currently seems to be the best option to save
their state’s economy. The reforms immediately reduced the unfunded liability from 2010 by
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$2.7 billion and are expected to save $4 billion over the next twenty years.15 If Rhode Island
could better convey to its state employees and teachers that this is currently their best option,
then perhaps there would be less opposition to the reforms.
At the beginning of 2011 only 49% of the Rhode Island Employees Retirement System’s
liabilities were funded, which meant the state was in dire need of lowering the cost of the system.
In 2010, the system paid out $278 million more than they received in contributions. These
insufficient funds were steadily increasing, and according to one Boston College Study, those
funds could have completely dried up as earlier as 2019.16 This would have left the fund with
billions of dollars of debt and no assets. However, Rhode Island made major moves to cut down
the costs of the pension fund with the reforms presented in the Rhode Island Retirement Security
Act.
The cost of the ERS was determined using actuarial valuations performed by Gabriel
Roeder Smith & Company which were provided on June 30, 2011. Unfortunately, the report only
considers contribution requirements associated with the defined benefit plan and does not
address any of the defined contribution plan requirements. The contribution rates and liabilities
presented were computed using the Entry Age Normal actuarial cost method, where the cost of
each retiree’s pension is distributed on a level of percent, starting when their employment begins
15 "What Are the Rhode Island Pension Reforms?"Www.civicfed.org. Institute for Illinois' Fiscal Sustainability,19
Apr. 2012.Web. 01 Feb. 2013.<http://www.civicfed.org/iifs/blog/what-are-rhode-island-pension-reforms>.
16 Raimondo, Gina M. Truth in Numbers: The Security and Sustainability of Rhode Island's Retirement System. June
2011.Web. 20 Feb. 2013.<http://wikipension.com/images/8/8f/TIN-WEB-06-1-11.pdf>.

and ending on their assumed retired date. The aim of this method is to disperse the cost of the
member over their career.17 The employer’s contribution rate is comprised of two pieces, the first
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of which is the employer normal cost rate. This is calculated from the difference of the normal
cost rate, which is determined as a percent of pay, and the member contribution rate. The second
part is the amortization rate, which is the amount required to pay off all of the accrued unfunded
liability over a closed period, which as of June 30, 2011, is 24 years.18
Ultimately, the actuarial valuations found that there has been much progress made since
the last valuations in financing the state’s liabilities. The funded ratios of both state employees
and teachers saw increases. The funded ratio of state employees increased from 48.4% in 2010,
to 57.4%, and the funded ratio of teachers increased from 48.4% in 2010, to 59.7%.19 Due to the
reforms instituted by RIRSA, the employer contribution rate experienced a large decrease. For
state employees, the employer contribution rate dropped from 36.34% in 2010, to 23.05%, and
from 35.25% for employers of teachers to 20.68%. It should be noted that these rates will be
appropriate for the year beginning July 1, 2013, and ending June 30, 2014. However, these
changes were slightly offset by continuing to recognize deferred asset losses from previous
valuations.20
The table below displays a summary of the actuarial valuation performed for the defined
benefit plan of state employees. The member rate has been altered due to the Rhode Island
17 IllinoisMunicipal Retirement Fund Manual for Authorized Agents for the Regular and SLEP Plans.Jan.2013.
Web. 21 Feb. 2013.<http://www.imrf.org/pubs/er_pubs/aamanual/online_aa_manual/7.20_a.htm>.
18 Newton, Joseph P., Mark R. Randall,and Ryan Falls.EMPLOYEES’ RETIREMENT SYSTEM OF RHODE ISLAND
ACTUARIAL VALUATION REPORT. 30 June 2011. Web. 20 Feb. 2013.
<https://www.ersri.org/public/actuarialValuations/ERS_VAL11.pdf>.<https://www.ersri.org/public/actuarialValuat
ions/ERS_VAL11.pdf>.
19 Newton, Joseph. EMPLOYEES’ RETIREMENT SYSTEM OF RHODE ISLAND ACTUARIAL VALUATION REPORT.

Retirement Security Act. It is now representative of a weighted average of state employees, who
contribute 3.75%, and correctional officers, who contribute 8.75%, which translates to
contributions of roughly $25.6 million from state employees and nearly $59.6 million from
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correctional officers. As stated earlier, their employer contribution rate is 23.05% of the
projected $681.5 million dollar payroll for the fiscal year ending June 30, 2014. This indicates
that the restructured defined benefit plan is expected to cost the state $157.1 million dollars that
year, which is significantly lower than the $246.5 million they were expected to contribute in
2013.
State Employees Valuation Summary
Item June 30, 2011 June 30, 2010
Contribution Rates (DB Only)
Member
Employer
4.33%
23.05%
8.75%
36.34%
Assets
Market value
Actuarial value
Return on market value
Return on actuarial value
Employer contribution for FYE
Ratio of actuarial value to market value
$2,337,532,264
2,443,690,798
19.5%
2.1%
126,668,459
104.5%
$2,083,616,670
2,532,090,798
14.0%
0.8%
123,620,378
121.5%
Actuarial Information
Employer normal cost %
Unamortized actuarial accrued liability (UAAL)
Amortization rate
Funding period
GASB funded ratio
5.16%
$1,811,671,665
17.89%
24 years
57.4%
2.64%
$2,700,450,527
33.70%
19 years
48.4%
Projected Employer Contributions
Fiscal year ending June 30,
Projected payroll (millions)
Projected employer contribution (millions)
2014
681.5
157.1
2013
678.4
246.5
21
The next table displays a summary of the actuarial valuation performed for the defined
benefit plan of teachers. The RIRSA also altered the member contribution of teachers, decreasing

it from 9.50% to 3.75%. This leads to a decrease in cost for teachers from $101.2 million in
contributions to $40.5 million. Employers of teachers have a contribution rate of 20.68%,
however this contribution rate is shared, with the state contributing 8.42% of the total and the
municipal government of wherever the teacher works contributing the remaining 12.26% of the
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employee’s salary. This will lead to an estimated total cost of $223.2 million paid through
employer contributions, of which the state government portion will be equal to $90.9 million,
leaving the local governments responsible in contributing the remaining $132.3 million. The
instituted pension reforms are expected to decrease the state government contributions for
teachers by nearly $60 million from the previous year, and they will lower local government
costs by approximately $91.1 million.
Teachers Valuation Summary
Item June 30, 2011 June 30, 2010
Contribution Rates (DB Only)
Member
Employer
State share
Local employer share
3.75%
20.68%
8.42%
12.26%
9.50%
35.25%
14.27%
20.98%
Assets
Market value
Actuarial value
Return on market value
Return on actuarial value
Employer contribution for FYE
Ratio of actuarial value to market value
$ 3,626,646,745
3,776,407,834
19.5%
2.1%
183,762,262
104.1%
$ 3,196,511,775
3,873,118,262
14.0%
0.8%
178,122,248
121.2%
Actuarial Information
Employer normal cost %
Unamortized actuarial accrued liability (UAAL)
Amortization rate
Funding period
GASB funded ratio
5.02%
$ 2,549,534,117
15.66%
24 years
59.7%
2.32%
$ 4,133,195,600
32.93%
19 years
48.4%
Projected Employer Contributions
Fiscal year ending June 30,
Projected payroll (millions)
Projected employer contribution (millions)
State share (millions)
Local employer share (millions)
2014
1,079.3
223.2
90.9
132.3
2013
1,064.8
375.3
151.9
223.4

22
Although it appears that the state of Rhode Island and its employee are paying
significantly less in contributions due to the introduction of the Rhode Island Retirement
Security Act; that is only because the actuarial valuations do not take into account the defined
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contributions portion of the newly instituted hybrid plan. Once the percentages of both plans are
added together, many government employees are paying approximately the same proportion of
their salary into the hybrid plan. However, the state government is contributing a significantly
smaller percentage compared to its employees.
With the introduction of the hybrid plan, state employees now only contribute 3.75% to
their defined benefit plan, but this is now complemented by a 5% contribution into a defined
contribution plan. When these payments are combined they are exactly equal to the previous
defined benefit plans contribution rate of 8.75% so state employees are not saving any costs with
the new plan. The same cannot be said for their employers though. Due to the institution of
RIRSA, their employers’ defined benefit contribution rate dropped to 23.05%, and after the
addition of their newly required defined contribution rate of 1%, their total contribution of
24.05% is significantly less than their contribution rate of 36.34% into the solitary defined
benefit plan.23
Very similar results can be seen in the contribution rates of teachers and their employers
under the RIRSA. Like state employees, teachers are also now required to contribute 3.75% into
the defined benefit plan, but their defined contribution rate varies in relation to whether or not
23 United States. Rhode Island Treasury.Employees' Retirement System of Rhode Island.Employees' Retirement
System of Rhode Island.Web. 21 Feb. 2013.
<https://www.ersri.org/public/documentation/RIRSA11StatePresentationVersion1.pdf>.

they are in the Social Security program. Those who are in the program only contribute 5% as
opposed to the 7% for those who are not. Depending on their Social Security status, teachers
either contribute a total of .75% less or 1.25% more than their previous defined benefit rate of
9.5%, but they will still incur similar costs as before. As was the case with state employees,
employers of teachers saw a large decrease in contribution cost due to the RIRSA. Their newly
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assessed defined benefit rate of 20.68% combined with their defined contribution rate of either
1% or 3% (depending on whether or not the member is part of Social Security), will lead to
considerably lower costs than their previously defined benefit rate of 35.25%.24
As of right now, there is no certainty as to whether or not Rhode Island’s pension reforms
will have a positive lasting effect on the state’s economy, but they are by far the most
progressive move any state has instituted to solving their retirement system’s financial
difficulties. The hybrid design is estimated to have the state employees’ pension portion
sufficiently funded in 2032 and the teachers’ portion in 2030, with both systems expected to
reach a fully funded level in 2035. Solving their pension system’s funding issues will
consequently allow improvements to the rest of the state’s infrastructure. However, there are a
few more policy recommendations that can ensure the Rhode Island retirement system is
sustainable beyond the foreseeable future.
The biggest issue with the retirement system, which was not addressed by the RIRSA, is
the lack of any measures to prevent spiking. Spiking can be extremely detrimental to a state’s
retirement funding, something California has been experiencing for quite some time. Twenty of
24 United States. Rhode Island Treasury.Employees' Retirement System of Rhode Island.Employees' Retirement
System of Rhode Island.21 Feb. 2013.
<https://www.ersri.org/public/documentation/RhodeIslandRetirementSecurityActof2011Teacher_rev1.pdf>.

their counties do not have anti-spiking provisions, which have been draining their public pension
funds for years. In the counties of Ventura and Kern, of those retirees who are receiving more
than $100,000 a year, 84% and 77% are collecting more now than they did when they were on
the job. Ventura alone has a pension program that is underfunded by approximately $761
million.25 This is caused by state employees like former County Chief Executive Marty
Robinson, who was earning around $228,000 approaching retirement. By cashing out $34,000 in
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unused vacation pay, an $11,000 bonus for having earned a graduate degree and more than
$24,000 in extra retirement benefits that the county owed her, she was able to spike her pension
up to $272,000 a year for the rest of her life.26 This is a sustainability issue that the state of
Rhode Island needs to prevent by including anti-spiking provisions into its current hybrid
retirement system.
Currently the only anti-spiking measure that the ERS contains is the exclusion of
overtime hours from final average salary calculations. I believe the retirement system should
eliminate this measure, and institute a similar statute to New York, by limiting the amount of
overtime that can be included in the final average salary calculations. 27 Hopefully this will
attract and retain more state employees because they will not feel as though they are being
cheated out of a larger retirement benefit that they feel they rightfully earned by working harder.
Another regulation that New York has in place that I would recommend for the Rhode Island
pension system is a measure to prevent large increases in salary. The state should institute a
25 Saillant,Catherine."Salary 'spiking' DrainsPublic Pension Funds,AnalysisFinds."Los Angeles Times. Los Angeles
Times, 03 Mar. 2012.Web. 25 Feb. 2013.<http://articles.latimes.com/2012/mar/03/local/la-me-county-pensions-
20120303>.
26 Saillant,Catherine."Salary 'spiking' DrainsPublic Pension Funds,AnalysisFinds .”
27 Hansen, Lee R. STATE EMPLOYEE BENEFITS IN NORTHEASTERN STATES. Connecticut General Assembly, 20 Feb.
2013.Web. 25 Feb. 2013.<http://www.cga.ct.gov/2013/rpt/2013-R-0139.htm>.

parameter which prevents a single year’s salary increase from exceeding the average of the
previous four years by 10%.28 This is a reasonable rule, which should not deter people from
wanting to work for the state and should help eliminate large spikes, which would lead to large
pensions and more funding issues. Lastly, I recommend not allowing cashing out of other
benefits, such as vacation pay, that may enlarge an employee’s retirement payments. This is to
prevent any large spikes, particularly among state employees earning six figures, which would
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cause large funding difficulties, similar to what many counties in California have experienced
recently.
Although the supplemental defined contribution plan is more portable for state employees
and teachers, I believe it should be altered slightly. I recommend that the vesting period for the
employer contributions be increased from three years to five years. Since the vesting period for
the defined benefit contributions is also five years, I believe both plans should have a matching
period. Since the employer contribution rate is so small at only 1%, many employees may not
care if they are not vested in it after three years and quit working. This will save the state money
too, because they will not be obligated to pay contributions to these “temporary” workers. By
increasing the vesting period to five years, it will encourage employees and teachers to stay and
work in Rhode Island for a longer period of time. The state should also sponsor informational
programs to update its employees as to why these reforms are occurring and why their pension
benefits may be lower than what they wanted or expected. If their employees better understood
the reasons behind these consequences, such as how large the current state unfunded liability is,
28 Hansen, Lee R. STATE EMPLOYEE BENEFITS IN NORTHEASTERN STATES.

then there may be less opposition to the modifications. With these policy recommendations the
hybrid plan could be sustainable for a much longer period of time.
As of right now, the state of Rhode Island believes that the hybrid plan established by the
reforms in the Rhode Island Retirement Security Act is the best option to return the ERSRI to
sufficiently funded status and sustain the pension of its state employees for years to come. But,
was this the best option for the state to make in regards to pension plan sustainability? It is one of
only four states that has an established hybrid plan as its primary retirement option for state
employees, one of which is Virginia whose plan won’t even become active until January 1 of
Link 18
2014.29 However, the other two established hybrid plans of Georgia and Oregon, which have
been in place since 2009 and 2003 respectively, are both sufficiently funded, with Georgia being
85 percent funded and Oregon being 87 percent funded.30 So does this hybrid plan answer the
question of retirement fund sustainability, or can the answer be found in another state’s structural
pension reforms?
One new plan that has been gaining some recognition recently is a cash balance plan. A
cash balance plan is a form of a defined benefit plan that defines the assured benefit in terms of a
stated account balance, which is more characteristic of a defined contribution plan.31 For
example, in a standard cash balance plan a member’s account is credited each year with a percent
of their salary by themselves and their employer. However, these contributions are not credited
29 Bradford,Hazel. "Virginia Assembly OKs Hybrid Retirement Plan,Contribution Hikes." PIonline.com.Crain
Communications,19 Apr. 2012.Web. 25 Mar. 2013.
<http://www.pionline.com/article/20120419/DAILYREG/120419844#>.
30 The WideningGap Update.
31 "FAQs About Cash BalancePension Plans."Frequently Asked Questions about Cash BalancePension Plans.U.S.
Department of Labor, n.d. Web. 01 Apr. 2013.
<http://www.dol.gov/ebsa/FAQs/faq_consumer_cashbalanceplans.html>.

with the actual rate of return that the investments achieve, but instead they receive a return that is
established by a formula that has been stated in law.32 When a member becomes eligible for
retirement, they have the right to an annuity based off of the total balance in their account at the
time of retirement. Many plans also allow the participant the option of a lump sum benefit equal
to their total account balance, which traditionally is rolled over into an individual retirement
account (IRA) or another employer’s plan if rollovers are permissible.33
Currently the only cash balance plan in effect is in the state of Nebraska, which has been
in effect since 2003. The employee contribution rate is 4.8 percent of their salaries, and the
Link 19
employer contribution rate is 7.5 percent for a total contribution of 12.3 percent. As stated
earlier, the government invests and manages these contributions, with nearly two-thirds of these
assets being held in U.S. or foreign stocks and the remaining amount being held in fixed income
investments.34 Although Nebraska predicts a future average return of 7.75 percent in these assets,
the actual rate of return that members are credited is equal to the greater of 5 percent or the
applicable federal mid-term rate, which is equal to the average yield on U.S. Treasury securities
with maturities that are between 3 years and 9 years, plus 1.5 percent. When the system is
considered to be sufficiently funded, an interest credit greater than 5 percent may be granted in
the form of bonus payments known as dividends. This has occurred in five of the last eight years,
although no dividends have been paid since 2008. Employees of the Nebraska plan have the
same retirement options with their account balance as mentioned previously, with the added
32 Biggs,Andrew G. Public Sector Pensions in Nebraska.Rep. Platte Institute, Oct. 2011. Web. 25 Mar. 2013.
<http://www.platteinstitute.org/docLib/20111212_Public_Sector_Pensions_in_Nebraska.pdf>.
33 "FAQs About Cash BalancePension Plans."
34 Biggs,Andrew G. Public Sector Pensions in Nebraska.

annuity options of survivor provisions and fixed annual increases to adjust for inflation. 35 This
cash balance option currently has the Nebraska Public Employees Retirement Systems (NPERS)
at a funding level of 84 percent.36
The main attraction of the cash balance system currently in use by Nebraska is the
portability of the plan. Participants in the system are vested in their contributions after only three
years of service. This is shorter than the vesting period of the majority of defined benefit plans
which is five years, but recently there seems to be a trend in most of those plans to increasing the
vesting period beyond five years. Between 2008 and 2010, the total number of retirement
Link 20
systems that require a vesting period of ten years or greater has increased by four plans.37 This
makes the cash balance plan a much more practical option with the contemporary workforce
needs than the defined benefit plans of years past.
Although cash balance plans may have a huge advantage over traditional defined benefit
plans when it comes to portability, they share the same major disadvantage, which is having
taxpayers bear the investment risks. This arises through the government’s assurance of a
minimum 5 percent return on account balances regardless of the actual market rates of return on
the investments. This 5 percent-plus guarantee is obviously a far better deal than a typical 401(k)
plan, where a participant would have to invest in U.S. Treasury stocks to receive an assured rate
37 Schmidt, Daniel.2010 Comparative Study of Major Public Employee Retirement Systems. Rep. Wisconsin
LegislativeCouncil,Dec. 2011.Web. 26 Mar. 2013.
<http://legis.wisconsin.gov/lc/publications/crs/2010_retirement.pdf>.

of return, which currently yield 2.8 percent over 20 years with no upside potential.38 The cash
balance plan provides an explicit rate of return subsidy on investments of similar risks that
defined contribution plans do not. Unlike defined benefit plans, the subsidy of cash balance plans
is much more transparent, which is equal to 5 percent minus the actual rate of return. This setup
closely resembles a financial product known as a put option, which gives the holder the right to
sell an underlying asset for a minimum price at a future date, the value of which depends on the
risk of the asset. In this particular case, that asset is the investment portfolio held by the
Nebraska Investment Council, which ultimately would affect the government and the
taxpayers.39
Another plan that is being employed by the majority of the private sector is a defined
contribution plan. In this type of plan, employees or employers, or even both, deposit fixed
Link 21
contributions into an individual account for the employee. Employees are then responsible for
where these contributions are invested, usually through financial carriers provided by their
employer, who then present the member with different investment options. Participants in this
type of plan are always vested in their contributions and the vesting period for their employer’s
contributions is generally less than that of a defined benefit plan, usually three to five years. At
retirement, the employee will receive the balance in the account, which is based on their
contributions over the years plus or minus their investment gains or losses.
Currently, the only two states that have a defined contribution only plan in effect are
Alaska and Michigan, which have been in place since 2006 and 1997 respectively. The
contribution rate of employees in Alaska is 8 percent, but in Michigan state employees do not

have to contribute to their defined contribution plan, but they may contribute up to 12 percent.
Instead, their employers contribute 4 percent and will match an additional 3 percent above that,
for a maximum contribution of 7 percent,40 while Alaska employers contribute 5 percent.41 As
stated above, employees are always 100 percent vested in their contributions, but both states
have a graded vesting period when it comes to employer contributions, which is displayed in the
chart below.42
Alaska
Years of Service Vested Percentage of Contributions
1 0%
2 25%
3 50%
4 75%
5 100%
Link 22
Michigan
Years of Service Vested Percentage of Contributions
1 50%
2 75%
3 100%
These plans currently have the states of Alaska and Michigan at funding levels of 60 percent and
72 percent respectively.43
Like a cash balance plan, pure defined contribution plans are extremely portable and can
therefore be shifted from multiple jobs as the employee transfers. Employees are also always
completely vested in their contributions, and vesting periods are very brief when it comes to their
employer’s contributions. This is all very attractive to today’s mobile workforce and could be
40 Snell,Ronald K. State Defined Contribution and Hybrid Retirement Plans.Rep. National Conference of State
Legislatures,July 2012.Web. 01 Apr. 2013.<http://www.ncsl.org/issues-research/labor/state-defined-
contribution-hybrid-retirement-plans.aspx>.
41 Schmidt, Daniel.2010 Comparative Study of Major Public Employee Retirement Systems.
42 General Plan Information.Publication.Stateof Alaska,n.d. Web. 27 Mar. 2013.
<http://www.fascore.com/PDF/alaska/plan_highlights_98214-04.pdf>.

very attractive in recruiting new employees who do not plan on staying in public employment for
the entirety of their career. Unlike defined benefit or cash balance plans, defined contribution
plans are much more transparent. Because the employer provides a match to the contributions of
the employee based on a set formula, there is no chance for policymakers to understate costs
through actuarial assumptions. This makes it very obvious to employees and taxpayers as to
whether or not the government has met its requirements at the end of each year. There is also
much less risk of varying pension costs from year to year because of the stability of employer
payments each year.44
The main disadvantages of a defined contribution plan occur with the way an individual
may handle their account. Many members who choose an investment option may neglect to
monitor it over time. This could lead to them not taking enough risk while they are young and
taking too much risk when they are closing in on retirement. Some employees may even
Link 23
completely fail to choose an investment option for their contributions, which would result in
their payments being defaulted into a low risk fund, such as a money market account.45
Participants may also encounter rather high management fees from their investment carriers,
which would reduce the overall return they receive from their contributions. Another problem
that arises when an employee finally retires is how to make their money last the rest of their life.
They receive the total amount in their account as a lump sum, which some employees may not
manage properly. They may not be aware of, or may not have, the option of converting their
retirement account into an annuity, which could lead to some employees poorly handling their

accounts. This may lead to retirees spending beyond their means and not having a constant
source of income for as long as they may live.
The other retirement plan option, which Rhode Island recently changed from and what
the majority of states still use is the defined benefit system. Although it is still the most common
pension system utilized by state governments, the state of Rhode Island cannot return to using
this type of retirement system. Up until last year they employed a defined benefit plan for state
employees and the results were disastrous. Their state employee pension program was only 48.4
percent funded and returning to this system would be a giant mistake. If they returned to this
system using the same contribution and accrual rates, then they would only continue to increase
their unfunded liability. The state of Rhode Island could address this problem by decreasing
member accrual rates and/or increasing employee contribution rates. Although this would reduce
the state’s unfunded liability, it would also greatly reduce retiree’s pension benefits which would
be very unattractive in attracting and retaining state employees, which is why Rhode Island
cannot return to a defined benefit only pension plan.
Link 24
Finally, there are some states that offer employees a choice of what type of retirement
plan they want. The following chart displays the different retirement plans offered by certain
states.46
Colorado Florida Indiana Montana
North
Dakota
Ohio
South
Carolina
Utah Washington
DB X X X X X X X
DC X X X X X X X X
Hybrid X X X X
46 Snell,Ronald K. State Defined Contribution and Hybrid Retirement Plans.

Of all the aforementioned states that have optional retirement plans, only Florida, Utah and
Washington have plans that are considered sufficiently funded, and Florida and Utah’s plans
barely reach that mark, with each plan being 82 percent funded. The plan that is the most funded
is Washington at 95 percent. 47 This may be due to the fact that enrollment in the hybrid plan is
mandatory for teachers and is optional for state employees.48 This greatly reduces responsibility
incurred by the state in providing retirement benefits for its employees and in turn helps to
reduce its amount of unfunded liability. Of those plans that are insufficiently funded, the
majority of them have a defined benefit plan as their primary system and only offer a defined
contribution or hybrid structure as a secondary option.
I believe that the Employees’ Retirement System of Rhode Island in its current form can
get back to a sufficient funding level and become sustainable with a couple more system
improvements. The reduced contribution rate and reduced accrual rate associated with the
smaller defined benefit part of the plan mean that the government will have less responsibility in
regards to their employees’ retirement payments. This, combined with the elimination of
Link 25
automatic pension increases until the plan is at least 80 percent funded, should help the system
return to a sufficiently, and eventual fully, funded level. The additional defined contribution part
of the plan allows the employee the opportunity to make just as much, if not more, of a
retirement benefit as they would have in a defined benefit only plan, without placing a large
amount of liability on their state’s government. The individual has more responsibility in regards
to their total retirement benefit, so if they perform poorly it does not negatively affect the entire
pension system.
48 Snell,Ronald K. State Defined Contribution and Hybrid Retirement Plans.

The system can be sustainable with just a pair of reforms. First of all, Rhode Island needs
to institute the anti-spiking reforms presented previously. By limiting the amount of overtime
hours from final salary calculations and preventing a single year’s salary increase from
exceeding the average of the previous four years by 10 percent, Rhode Island can insure that no
one attempts to take advantage of their pension system and end up in the same fiscal trouble as
California. Secondly, the vesting period for employer contributions in the defined contribution
plan should be increased to five years, because many employees may not care if they are not
vested after three years and quit working due to the employer contribution rate being only 1
percent. Increasing the defined contribution vesting period to five years will also encourage
employees and teachers to stay and work in Rhode Island for a longer period of time. By
implementing these changes, the Rhode Island ERS can sustain employee pensions for a long
time to come.
Link 26
Works Cited
Biggs, Andrew G. Public Sector Pensions in Nebraska. Rep. Platte Institute, Oct. 2011. Web. 25
Mar. 2013.
<http://www.platteinstitute.org/docLib/20111212_Public_Sector_Pensions_in_Nebraska.
pdf>.
Bradford, Hazel. "Virginia Assembly OKs Hybrid Retirement Plan, Contribution Hikes."
PIonline.com. Crain Communications, 19 Apr. 2012. Web. 25 Mar. 2013.
<http://www.pionline.com/article/20120419/DAILYREG/120419844#>.
Doherty, Kathryn M., Sandi Jacobs, and Trisha M. Madden. Publication. N.p.: n.p., n.d. No One
Benefits: How Teacher Pension Systems Are failing Both Teachers and Taxpayers.

National Council on Teacher Quality, 2012. Web. 30 Jan. 2013.
<http://www.nctq.org/p/publications/docs/nctq_pension_paper.pdf>.
Employees' Retirement System of Rhode Island. N.p.: Employees' Retirement System of Rhode
Island, n.d. An Employee's Guide to Understanding the Rhode Island Retirement Security
Act. Employees' Retirement System of Rhode Island, Jan. 2012. Web. 30 Jan. 2013.
<https://www.ersri.org/public/documentation/FINAL_RIRSAGuide_January2012.pdf>.
"FAQs About Cash Balance Pension Plans." Frequently Asked Questions about Cash Balance
Pension Plans. U.S. Department of Labor, n.d. Web. 01 Apr. 2013.
<http://www.dol.gov/ebsa/FAQs/faq_consumer_cashbalanceplans.html>.
General Plan Information. Publication. State of Alaska, n.d. Web. 27 Mar. 2013.
<http://www.fascore.com/PDF/alaska/plan_highlights_98214-04.pdf>.
Hansen, Lee R. STATE EMPLOYEE BENEFITS IN NORTHEASTERN STATES. Connecticut General
Assembly, 20 Feb. 2013. Web. 25 Feb. 2013. <http://www.cga.ct.gov/2013/rpt/2013-R-
0139.htm>.
Illinois Municipal Retirement Fund Manual for Authorized Agents for the Regular and SLEP
Plans. Jan. 2013. Web. 21 Feb. 2013.
<http://www.imrf.org/pubs/er_pubs/aamanual/online_aa_manual/7.20_a.htm>.
Linn, Allison. "Funding Gap for State Retirement Benefits Rises to $1.4 Trillion." NBCNEWS.com.
Economy Watch, 18 June 2012. Web. 30 Jan. 2013.
<http://www.nbcnews.com/business/economywatch/funding-gap-state-retirement-
benefits-rises-1-4-trillion-834473>.
Link 27
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RHODE ISLAND ACTUARIAL VALUATION REPORT. 30 June 2011. Web. 20 Feb. 2013.
<https://www.ersri.org/public/actuarialValuations/ERS_VAL11.pdf>.
Raimondo, Gina M. Truth in Numbers: The Security and Sustainability of Rhode Island's
Retirement System. June 2011. Web. 20 Feb. 2013.
<http://wikipension.com/images/8/8f/TIN-WEB-06-1-11.pdf>.
Saillant, Catherine. "Salary 'spiking' Drains Public Pension Funds, Analysis Finds." Los Angeles
Times. Los Angeles Times, 03 Mar. 2012. Web. 25 Feb. 2013.
<http://articles.latimes.com/2012/mar/03/local/la-me-county-pensions-20120303>.

Schmidt, Daniel. 2010 Comparative Study of Major Public Employee Retirement Systems. Rep.
Wisconsin Legislative Council, Dec. 2011. Web. 26 Mar. 2013.
<http://legis.wisconsin.gov/lc/publications/crs/2010_retirement.pdf>.
Snell, Ronald K. State Defined Contribution and Hybrid Retirement Plans. Rep. National
Conference of State Legislatures, July 2012. Web. 01 Apr. 2013.
<http://www.ncsl.org/issues-research/labor/state-defined-contribution-hybrid-retirement-
plans.aspx>.
"What Are the Rhode Island Pension Reforms?" Www.civicfed.org. Institute for Illinois' Fiscal
Sustainability, 19 Apr. 2012. Web. 01 Feb. 2013.
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The Widening Gap Update. Rep. N.p.: n.p., n.d. Pewstates.org. The PEW Charitable Trusts. Web.
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1Teacher_rev1.pdf>.
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