Gov. Lincoln Chafee says Rhode Island would be first state in U.S. to adopt hybrid retirement plan for public employees

If state lawmakers approve the Chafee administration’s plan to overhaul Rhode Island’s ailing public pension system, most state workers, teachers and many municipal employees will be enrolled in a so-called hybrid retirement plan.

The hybrid plan that Governor Lincoln Chafee and General Treasurer Gina Raimondo have been touting would combine a smaller guaranteed monthly payout from a traditional pension with a variable payout based on the investment earnings of a 401(k)-style plan.

While pitching their pension overhaul legislation to a joint meeting of the Senate and House  Finance Committees Oct. 24, Chafee, an Independent, spoke at length about how the plan would address the state’s $9.4-billion pension shortfall.

"And also,’’ the governor said, "somebody told me recently that if Rhode Island does a hybrid plan we’ll be the first state in the nation to do this.’’

The first in the nation?

Chafee continued: "And I think that’s in all of our interest to show the rest of the country that we can take on this challenge and share the ups and downs of the market with the employer and the employee. Right now, we the state, the employer, takes all the hit when the market goes down. And so I think the country will be looking at us . . . "

Rhode Island, of course, isn’t the only state to wrestle with pension problems. So we wondered: Would Rhode Island be the first in the nation to adopt a hybrid retirement plan?

The facts

A quick search of the Wall Street Journal’s archives turned up a story from July 10, 2010, entitled "States Shift to Hybrid Pensions.’’  The article begins: "State governments, one of the last bastions of guaranteed pensions, are increasingly taking a page from 401(k) plans that dominate the private sector.’’  Utah, Michigan, Oregon and Washington, the article states, all have some form of hybrid plan.

Next, we called The National Association of State Retirement Administrators, a nonprofit membership organization whose members are directors of the nation’s public retirement systems. Keith Brainard, the association’s research director, provided us with a table that shows that seven states have some form of hybrid plan for public employees. They are: Georgia, Indiana, Michigan, Ohio, Oregon, Washington and Utah. (Michigan offers the hybrid plan only to school employees.)

Their plans, like the one the Chafee administration has proposed for Rhode Island, share two features: a traditional pension with a guaranteed benefit, coupled with a 401(k)-style component that offers a payout tied to investment earnings.

We called the governor’s office, and his spokeswoman, Christine Hunsinger, quickly responded that the governor had "made a mistake."  Rhode Island, she conceded, would not be the first state to adopt a hybrid plan.

OK, so the governor was wrong. Rhode Island didn’t come up with the idea first. But we still wondered what was happening elsewhere in the country.

We contacted retirement administrators in other states to find out.

At least two states -- Washington and Indiana -- have had hybrid retirement plans since the 1990s.

During the 1990s stock-market boom, a legislative pension committee in Washington saw an opportunity to "self-fund" a portion of its retirement plan, said Dave Nelsen, legal and legislative services manager for the Washington State Department of Retirement Systems.

The teachers union was the first to endorse the idea, he recalled, and in 1995, a bill "sailed through the legislature" to allow teachers to supplement their traditional pensions with something similar to a 401(k) plan.

In 2002, the State of Washington passed its own bill to create a hybrid option for all new public employees.

Indiana enacted legislation in 1998 to allow public employees to invest some of their retirement money in selected bonds and money market funds.

(The hybrid plan proposed by the Chafee administration is similar to Indiana’s, said Brainard, of the National Association of State Retirement Administrators.)

Ohio offered a hybrid plan to new state employees and those with less than five years of service in 2003.

Oregon followed in 2004; Georgia in 2009; and Michigan (for school employees only) in 2010.

Utah last year replaced its traditional defined benefit pensions with 401(k)-style plans for new state and municipal workers.

The Chafee administration’s proposal could, however, set Rhode Island apart from other states in one respect, Brainard said: it would require not just new hires but also most existing employees (except judges, state police, correctional officers and municipal police and firefighters) to participate in the hybrid plan.

In fact, Hunsinger told PolitiFact that was actually what the governor had been told would make Rhode Island "the first in the nation."

But we’d caution the governor on that statement, too. We found that at least one other state -- Kansas -- has proposed doing the same.

The ruling

Governor Chafee was clearly wrong when he told state lawmakers that if they approve his administration’s pension reforms, Rhode Island would "be the first state in the nation’’ to adopt a hybrid plan.

These types of plans have been widely publicized in the national media and on the National Association of State Retirement Administrator’s web site, and our research found at least seven other states offer hybrid pension plans, some dating back to the 1990s.

We rule his statement False.


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Featured Fact-check

George Nee

stated on October 19, 2011 in a pension forum

"This is the first time in our state, and one of the first times in the country, where benefit reductions . . . has happened to people who are retired."