MUNICIPAL PENSIONS | 5
Background Information
During the six hearings held to discuss Rhode Island’s municipal pension system, the Senate Municipal
Pension Study Commission was presented with the following information to provide background for the
municipal pension reform discussion.
OVERVIEW OF PENSION PLANS
There are primarily three types of pension plans: defined benefit plans, which guarantee benefits to
employees who meet a series of criteria, such as years of service, salary base and retirement age, regardless
of fund performance; defined contribution plans which promise a contribution to a retirement savings plan
by the employer; and hybrid plans which combine elements of both plans to share the risk and reward
between employer and employee.
In defined benefit plans, the employer bears the risk and reward for fund performance and actuarial
performance as it is responsible for making payments toward the system’s unfunded actuarial liability in
addition to the “normal cost” payments. Conversely, defined contribution plans, such as 401(k), 401(a),
403(b), and 457(b) plans, place the risk (and reward) of market performance on the employee.
GASB Statement 25 established financial reporting standards for defined benefit pension plans, requiring
that pension trust fund administrators must disclose both the fair value of pension plan assets, liabilities
and net assets, as well as actuarially-determined information on the funded status of the plan and progress
toward full funding.
Other post-employment benefits (OPEB), primarily retiree health care, pose challenges for both the State
and municipalities. Furthermore, there are currently no state administered OPEB plans for municipalities.
Each municipality is responsible for administering its own plan. Presently, these costs are almost entirely
unfunded.
NATIONAL OVERVIEW
Underfunded pension and other post-employment benefits (OPEB) plans are not unique to Rhode Island.
The issues associated with defined benefit plans have received significant attention on a national scale in
light of increased actuarial liabilities for future benefits. These increases have been driven in large part by
employees retiring earlier and living longer as well as recent investment losses which have been
compounded in some cases by the lack of adequate funding. .5
On a national level, many State and local governments have underfunded their pension systems for a decade
or more because they believed that the stock market boom of the 1990s would continue to fund any
shortfalls. Despite the market’s recent downturn, under-funding continued due to growing State and local
budget deficits.6
The financial crisis in 2008 affected public pension systems across the country. Plans in Virginia and
Maryland lost up to 21 percent of their portfolios. Their loses were typical of what pension funds suffered
around the country. The Center for Retirement Research at Boston College predicted that before the
market crash, public systems would have up to $3.6 trillion in their accounts by now; however, estimated
pension fund balances are $1.2 trillion short of that mark.7
Some experts indicate that the funding gap may have become so great that no investment strategy can close
it and taxpayers will eventually have to cover the massive bill.8
MUNICIPAL PENSIONS | 5
Background Information
During the six hearings held to discuss Rhode Island’s municipal pension system, the Senate Municipal
Pension Study Commission was presented with the following information to provide background for the
municipal pension reform discussion.
OVERVIEW OF PENSION PLANS
There are primarily three types of pension plans: defined benefit plans, which guarantee benefits to
employees who meet a series of criteria, such as years of service, salary base and retirement age, regardless
of fund performance; defined contribution plans which promise a contribution to a retirement savings plan
by the employer; and hybrid plans which combine elements of both plans to share the risk and reward
between employer and employee.
In defined benefit plans, the employer bears the risk and reward for fund performance and actuarial
performance as it is responsible for making payments toward the system’s unfunded actuarial liability in
addition to the “normal cost” payments. Conversely, defined contribution plans, such as 401(k), 401(a),
403(b), and 457(b) plans, place the risk (and reward) of market performance on the employee.
GASB Statement 25 established financial reporting standards for defined benefit pension plans, requiring
that pension trust fund administrators must disclose both the fair value of pension plan assets, liabilities
and net assets, as well as actuarially-determined information on the funded status of the plan and progress
toward full funding.
Other post-employment benefits (OPEB), primarily retiree health care, pose challenges for both the State
and municipalities. Furthermore, there are currently no state administered OPEB plans for municipalities.
Each municipality is responsible for administering its own plan. Presently, these costs are almost entirely
unfunded.
NATIONAL OVERVIEW
Underfunded pension and other post-employment benefits (OPEB) plans are not unique to Rhode Island.
The issues associated with defined benefit plans have received significant attention on a national scale in
light of increased actuarial liabilities for future benefits. These increases have been driven in large part by
employees retiring earlier and living longer as well as recent investment losses which have been
compounded in some cases by the lack of adequate funding. .5
On a national level, many State and local governments have underfunded their pension systems for a decade
or more because they believed that the stock market boom of the 1990s would continue to fund any
shortfalls. Despite the market’s recent downturn, under-funding continued due to growing State and local
budget deficits.6
The financial crisis in 2008 affected public pension systems across the country. Plans in Virginia and
Maryland lost up to 21 percent of their portfolios. Their loses were typical of what pension funds suffered
around the country. The Center for Retirement Research at Boston College predicted that before the
market crash, public systems would have up to $3.6 trillion in their accounts by now; however, estimated
pension fund balances are $1.2 trillion short of that mark.7
Some experts indicate that the funding gap may have become so great that no investment strategy can close
it and taxpayers will eventually have to cover the massive bill.8
