With Woonsocket, Will They Start Listening, Now?


Sandy Seoane reports in the Valley Breeze that Woonsocket’s pension system has 10-to-15 years to bust:

The city’s Pension Investment Board and consultants … say state officials used unrealistic projections for the city’s investment returns, and, as it stands, the system will likely run out of money in 10 to 15 years.

“The fund itself is on hospice care,” said Board Chairman Richard Lepine. “We are the custodians of a fund that will die too soon.”

According to an actuarial report by USI Consulting Group delivered to the city on October 26, “The approved contribution schedule will no longer fully fund the plan within the targeted 22 year period. Furthermore, this schedule is no longer expected to allow for the attainment of an 80 percent funded status during the projection period and therefore the 3 percent COLA is not expected to take effect.”

The attempt to blame “state officials” is pathetic.  The assumed investment return of 7.5% per year was implemented before the state Budget Commission started, and before that, the city assumed an 8.25% return.  There are no surprises, here.

I was pointing to this problem in 2012, before the Budget Commission was in place.  (See here, here, and here.)  What Woonsocket illustrates to perfection is that our thinking about government pension programs is simply wrongheaded, and the steps of denial are very clear and getting smaller.

Prior to 1980, the city simply paid the bills for retirees’ pensions as they came.  I was in a New Jersey kindergarten at the time, so I’m guessing the motivation, but with government growing and the economy proving vulnerable, the benefit was probably beginning to look risky.   The city only took a partial step, though.  Firefighters could still enter the old system until 1985, and for the next 17 years, although new employees went into a state-run pension program, the pay-as-you-go approach continued for older employees.  By 2002, things were looking undeniably iffy again, and Woonsocket voters approved a “pension obligation bond” — on the recommendation of elected officials and smaht advisers, no doubt — and the General Assembly passed enabling legislation.

What made the bond seem like a plausible idea was the faulty notion that a pension debt is “fully funded” if you have enough money in the bank right now that it will grow with investment profits and contributions fast enough to pay off your promised benefits.  The interest on the bonds was less than the 8.25% that the city expected to make on investments, so on paper it all worked out.

Pause on the theory for a moment: The pension fund has to be a sure thing, but people buy government bonds because they’re sure things.  Why would one assume that pension fund managers can magically get a bigger sure thing than other investors?

Even before the market collapsed in 2007, Woonsocket’s “fully funded” pension plan had been realizing an annual return of only 1 to 1.5% (depending when it was first invested), and then by 2011, it had actually lost 34% of its value.  In other words, the investors who bought the bonds got an essentially risk-free investment (of around 6.2%, I think), but they got it because somebody duped Woonsocket taxpayers into believing they could do even better.

So, in 2010, Woonsocket joined the state in pretending that 7.5% would now be the “sure thing” return on investments, and reworked its on-paper plan for putting money into the fund.  But now Woonsocket is complaining that 7.5% is pie-in-the-sky, too, over the long term, for Woonsocket and for the state.

These decades of lost time all make the final pinch more painful, at least for whoever loses the political tug-of-war.

The underlying problem is that people in the investment industry make a lot of money by coming up with plans that, on paper, will accomplish what the politicians who run government want to accomplish.  The politicians, in turn, keep their game going by convincing voters that this new adjustment to the plan will work (or is at least the best that can be done right now) and then acting surprised and let down when more adjustments are needed.

This creates the impression of consensus among everybody whom voters entrust to make decisions on these issues (with fine print disclaimers published somewhere, of course), and another group whom voters trust, the news media, isn’t in a position to say otherwise.  The story becomes that all the experts agree that, given a difficult situation, Plan X is the best that can be done.  Maybe mention is made that some outside group — with questionable expertise and more-questionable motivation — is warning that Plan X won’t work, but it’s all very academic.

Well, it’s not going to be academic for long.  Woonsocket is even closer to the edge, now, and the government of Rhode Island isn’t far behind.  Seoane reports the next step of the denial as follows:

The financial experts presented a state bailout as the only viable solution.

That isn’t a “solution” for the actual problem.  It just passes it on to the state, which is fast approaching its own moment of clarity and crisis.  At some point, the widespread assumption will have to be challenged that a large, managerial state can competently do what voters have been duped into tasking it with doing.  The sooner it’s challenged, the less painful the fix will be, but nobody wants to face it because, as I suggested yesterday, that thread of thinking goes quickly to things that people want to be unthinkable.