Checking in on the Next Pension Crisis


As far as I can tell, nobody’s been tracking Rhode Island’s state pension fund according to the performance expected when the state implemented reform in 2011, and it’s a bit of an eye-glazing exercise to go back and refresh one’s memory.  Still, something in Ted Nesi’s article, yesterday, made a quick review seem justified.

Nesi’s headline point is that the “shortfall” for state employee and teacher pensions hasn’t moved much, increasing to $4.55 billion as of June 2015, up from $4.5 billion in 2012, which will be a little worse now that the state has agreed to a legal settlement with retirees and the unions that used to represent them.  (I’m getting different numbers than Nesi from the source material and am trying to clarify.)  By “shortfall,” Nesi means the unfunded/unamortized actuarial accrued liability (UAAL).

This is the paragraph that deserves a closer look:

The settlement has caused a dip in the state’s pension funding levels, which measure how much of the state’s long-term liability could be covered by its current assets. The pension funding level for state employees fell from 57.4% before the deal to 56.6% as of June 30, while the funding level for teachers fell from 59.6% to 58.8%.

As of the 2014 audit, the combined funded ratio for teachers and state employees was 58.7%, which the settlement probably reduced to 57.9%.  Documents that used to float around during the reform push appear to have disappeared from the Internet, but this old post on the Current has charts of the data.  The spring after reform, the state was expecting the pension fund to be around 60% funded by 2016 and on a strong upswing, having dipped toward 55% around 2014.

That’s with a 7.5% investment return.  A second chart showed the trend if the market went wrong and the state only realized 5% return on investments, in which case, the projection was for hovering around the mid-to-high 50s until whenever the investment return improved to 7.5%.

As of the 2014 audit, the investment returns were running at 12% for the previous five years, which appears to have kept the fund from hitting the projected low point.  But we’re supposed to be experiencing the upswing, now, and it should be even stronger than projected, even with the five-year average investment return dipping to 9.8% by the end of fiscal 2015.  What’s going on, here?

This should be a matter of major concern, because investment returns are likely to drop in coming years, and pension reform included a provision that dubs the plan “endangered” if it dips below 50% funded after five years of decreases.  At that point, the pension board begins to take on constitutionally dubious authority to revise reforms.

(Note: If Andrew Morse quoted the legislation correctly in the post at that last link, somebody revised the language to eliminate the “and” that required both the 50% and five-year rules to apply to “endangered status.” That may mean one or the other would be sufficient as a trigger.)

  • Rhett Hardwick

    Since pensions have all but disappeared in the private sector, and government salaries now meet, or exceed, private sector salaries; why are we even talking about pensions?

  • D. S. Crockett

    Well said, Rhett. All new hires whether State or Municipal should be put on the Social Security system, period. This State needs a Scott Walker!

  • Max

    Except that they’re written into union contracts. It’s nice to talk tough but we’re in Rhode Island. Look how the last pension reform worked out. You had a judge hearing the case who along with other family members were future and current beneficiaries. Lets be realistic.

    • OceanStateCurrent

      That’s why what’s going to happen is: The pension fund will go into “endangered status,” and the Pension Board will present a “default” solution that raises taxes, one way or another, and reamortizes the debt (making it more expensive in the long term), and another solution that legislators find more distasteful. There’ll be some political dancing, and the legislature will fail to act, allowing the “default” to become law without any direct accountability.

      • Max

        I couldn’t tell you how it would happen but we’ll end up paying more in the end.

      • mg riley

        A pension related tax hit is all but certain but it will come from providence bailout not from the state pension plan

        • Max

          No doubt from Providence but why not the State?

    • D. S. Crockett

      F___. the Union Contracts.

      • ShannonEntropy

        As Chief of Grammar Police here ,, Davy ,, I must inform you that the word is spelled F^¢#

        I say let the pension funds run dry … then let the pensioners & the State spend the rest of their lives in court suing each other à la Jarndyce v. Jarndyce

  • Rhett Hardwick

    Is a referendum possible? But think of this. 23% of working Rhodents draw their pay check from a government, and they all have spouses, children, siblings and in-laws who vote. Would a referendum have a chance?