Gallogly: Discount Rates and the Oversight Spotlight

In addition to Woonsocket, the topic of the day, I asked Dept. of Revenue Director Rosemary Booth Gallogly some broader questions on Tuesday afternoon.

First, I’ve been wanting to follow up with her about two curious aspects of the legislation to bring Central Falls into the state Municipal Employees Retirement System (MERS), a section of the law that was conspicuously marked “reserved” and mention of an “Appendix E-A” of the Central Falls retiree settlement agreement that was apparently new.  On the first:

Ocean State Current: On that question, a technical question: there was a section that was marked “reserved” in that legislation. Do you know why that would be? In the House bill, that was the section that would have been the increase to 75%, to keep retirees at 75% of their prior pensions.  In the Senate version, that section of the law was marked “reserved.”

Rosemary Booth Gallogly: That’s very interesting; I hadn’t noticed that. Thank you for bringing it to my attention.

OSC: Did your office write that legislation?

RBG: We wrote the legislation that was submitted to the General Assembly members. They have it crafted by leg council, and there were a few changes. Most of them were abbreviations and those types of things. I didn’t see the “reserved,” so I will have to check to see whether that’s something we did.  In some cases, it’s good to leave some sections between sections of the General Laws, in case there’s, let’s say, some other community comes in.  That wasn’t my intent my intent when we were writing it, but I will check on that. It wasn’t anything strategic about it, but I’ll have to find out why.

On the appendix:

OSC: Also in that legislation, it refers to appendix E-A in the agreement with the receiver, but I have the document that was approved by the bankruptcy court, and it doesn’t have such an appendix.

RBG: There’s a new appendix that basically reflects all of the final votes of the individual retirees.  Some people didn’t vote in favor of it. But I can get you that, because it will be part of the final agreement that goes to the bankruptcy court.

As yet, I have not heard back from the director.  Of course, given recent news, notably Providence’s “tentative” pension agreement with unions and retirees, Gallogly has likely had her attention drawn elsewhere, especially in light of one of my subsequent questions:

OSC: Do you have any sense of how many more cities and towns are on the brink of oversight?

RBG: I am such an optimist that I’m going to say “none,” but there are some, obviously.  West Warwick, because of their pension issues.  I’m still watching Providence closely.  Pawtucket, I think, has been doing a fair job, and they keep me informed on what they’re doing with their challenges.  I would say that our “highly distressed” communities are the ones that are most closely watched. That’s not to say that we’re not looking at the others.  As you know, I’m the chair of the pension study commission, and there are a lot of locally administered plans that are pretty scary, so somebody can look good, fund-balance wise, but if you look at West Warwick.  They said, “Oh, we had a surplus.”  See, you have a surplus, but you haven’t funded your ARC.  Providence could have a big surplus if they didn’t put $60 million into their pension plan. They could have easily said that they had a surplus.

To follow up, I mentioned Warwick, which is certainly not on the state’s dire watch list (yet), to prod on the broader pension issue:

OSC: In Warwick, right now, there’s a tiff about the discount rate. Are you comfortable with discount rates in the seven to eight range?  Or is that way overestimated?

RBG: Well, the state adopted 7.5%, and so drawing a concrete line and saying if you go above this it’s a bad thing.  I mean, I sit on the state investment commission, and we obviously are concerned about risk, which is basically what you have to take to get the higher rates of return, so there’s kind of a balance there.  So, I would say, Warwick; they had three plans that were in tier 1, which meant that they had already done the experience study; they had already adopted the assumptions.

OSC: But none of them have seen five-year returns much over 5%, as I recall. Shouldn’t that set off some red flags?

RBG: The state, if you look at the five-year average…

OSC: It’s 2.28.

RBG:  Yeah, so, this is definitely a challenging time for everybody on the investment side.

As Gallogly would no doubt acknowledge (and has unique perspective to know), it’s a challenging time all around in Rhode Island.