A summary for Pensions & Investments of Rhode Island’s latest report concerning local pension plans passes a spotlight quickly past the ways in which government agencies, aided and abetted by labor unions, obscure the costs of benefits:
For the underfunded plans, assumptions about investment returns and payroll growth “may not be realistic,” said the report, which cited Providence’s 8% return assumption as the highest in the state.
“In more than a few cases … local pension liabilities are, or have the potential for, crowding out other important budget priorities.”
Take a look at the scorecard for Providence on page 22 of the report. The plan is 26.3% funded, which means it would have to have about three times more money in the fund collecting investment returns right now in order to be solvent. The city assumes that its payroll will only grow 3.5% per year, which must account for both raises and new hires. It also assumes an unrealistic 8% return on its investments every single year, which means it can put less actual money into the plan each year, because it assumes more will come from investments than is likely.
To top it all off, Providence has more former employees collecting pensions than it has employees paying into the system. Consequently, it pays out more every year than it adds to the fund, by about 4%.
Think about that. The city’s pension fund is actually shrinking, not growing.
In order to buy labor peace, Rhode Island governments have made huge retirement promises. So they don’t break the bank, they’ve then disguised the true cost with unrealistic assumptions.
That sword cuts both ways, though. Because the pressure that the pensions should be applying to budgets is drastically understated, labor unions are able to push for bigger raises and benefits for active employees, which has crowded out the money for appropriate pension funding. Now that accounting standards are making pension funding more visible and even mandatory, it has joined with other labor costs in squeezing the budgets for other expenses — even as prevailing wage and other union rules have ensured that the money for those other expenses cannot go as far as it should.
As the RI Center for Freedom & Prosperity’s new report on excessive labor costs shows, these and other problems are creating a huge additional burden on our state, which is already struggling to meet budgets while allowing its economy to grow.