Woonsocket Matters to Rhode Island and the Nation

John Hill’s Providence Journal article about Woonsocket’s deficit problem contains two important lessons:

As bad as the city’s financial situation is now, the state-appointed Budget Commission running its finances was warned Tuesday that if no fiscal actions are taken, the city-school deficit could grow to $91 million by 2017. …

Commission members were uncomfortable with how Findlay and the city’s Finance Department had calculated spending on city pensions. Commission member Peder A. Schaefer said he felt the staff had used a method that overestimated the costs of financing the city’s pension debt.

The projection assumed the city would need to set aside about $11 million a year to pay off a 2002 pension bond, but Schaefer said the real annual cost was closer to $3.6 million. If the projection was to use a true baseline, it should use that number, he said.

The first lesson is that everybody who’s interested in these topics should read the Ocean State Current.  An article here from last May explains the problem:

…  in comments after Governor Lincoln Chafee’s related press conference, yesterday, Gallogly presented Woonsocket’s budgetary gaps as much greater, to the tune of around $7 million a year. …

Asked whether the budget commission would make five-year amortization of the plan a priority, Gallogly told The Current, “they definitely will.”  She explained that the city has expressed a desire to increase its pension payments after it is done paying off its deficit-bond debt, “but that’s a five-year bond, so that’s going to be a while before that’s paid off.”

According to the city’s actuarial consultant, USI Consulting Group, the employer contribution, as of last July, should have been $10,484,317 under the five-year amortization schedule.  Instead, the city has illegally been following a 30-year amortization schedule, reducing its payments to $3,610,195.

Here we are, seven months later, in the thick of another legislative session, after an election cycle, and public officials are only now getting around to airing this dispute.  Expect them to attempt a resolution that doesn’t involve informing the public or addressing the underlying problems, probably in the form of state legislation that makes the legal funding conflict simply go away.

That would be a huge mistake because of the second lesson of the article: The public is being poorly served by the way the pension issue is being framed.  Everybody is being sold on the goal line of being “fully funded,” but just a few years ago Woonsocket had achieved that goal.  The numbers people told them that their pension system could be made healthy at the lowest cost by using bonded debt to put the fund at the level that would supposedly make it self sustaining until its remaining beneficiaries had run their lives’ course.

Unfortunately, investment is just educated gambling, and as with every city and town in Rhode Island, plus the state itself, political calculations have pushed the educated guess for investment profits way too high.  Consequently, Woonsocket’s pension fund lost about a third of its value.  The $10+ million contribution is what actuaries (still using the high guesses) think the city needs to pay into the fund every year in order to get it back on track in five.

(The five-year timeline was part of the deal that allowed the city to borrow money to bring itself from 0% funded to fully funded all at once.)

Rhode Islanders should take Woonsocket’s example as an opportunity to learn that “fully funded” does not mean that the pension problem has been solved in the sense they think it means.  It does not mean that the portion of their taxes that will go into the pension fund will be locked in.

The employees’ contributions may be locked in as a percentage of their salaries, but taxpayers alone are responsible for making up for any losses at the investment table.  And again, the estimates of potential winnings that are being sold to voters are way too high if the goal is to ensure a stable system.