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Yesterday’s approval of broad pension reform by the Rhode Island legislature increases financial stability for the state and may set a precedent for other U.S. states, according to Fitch Ratings.

Rhode Island’s pension reform provides some relief to the state’s municipalities to the extent that they participate in the state’s pension plans. The governor is expected to sign the legislation within the week. The reform is unusually expansive. Specifically, it changes the benefits available to currently vested employees as well as current retirees going forward. The sweeping nature of the reform may inspire similar efforts in other states grappling with large unfunded pension obligations. Fitch will closely monitor the nature and progress of expected legal challenges to the legislation, for their implications both in the state and nationwide.

The Rhode Island Retirement Security Act of 2011 was introduced by Governor Chafee and General Treasurer Raimondo. The Act tackles a wide range of factors that determine the liabilities of the state’s pension systems. Among them are retirement age, cost of living increases, amortization period of the unfunded accrued liability, employee and employer contributions, level of future benefits, and plan design. In addressing all of these factors in one piece of legislation, and applying the reforms to current, future, and retired state employees, teachers, judges, public safety personnel, and municipal employees (six pension systems in total), Fitch believes Rhode Island’s pension reform is the most comprehensive measure undertaken by any of the states in recent years.

Fitch views as an important credit factor the Act’s expected reduction of the systems’ unfunded actuarially accrued liability to $4.3 billion from $7.3 billion; a $3 billion or 41% reduction. Further, the Act will provide significant annual cost savings and provide employers with a degree of protection from market volatility due to the systems’ move to a hybrid defined benefit/defined contribution plan. To ease the rate of growth in required contributions, the Act also changes to a 25-year amortization period for the unfunded accrued liability from the prior 19 years.