The Reason for Pension Shortfalls in Providence

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Taking up Providence pension woes, Dan McGowan and Walt Buteau highlight a recent study concluding the following:

Wainwright Investment Counsel LLC projects the beleaguered fund would have an additional $305 million today if city leaders made the correct yearly payments between 1996 and 2006 and again in 2010 and 2012, an amount that would bring the city’s current pension funding level close to 50%.

The firm calculated the amount that city leaders failed to contribute to the system – $111 million – and the monthly returns the actual money in the retirement fund saw between July 1996 and June 2016. Between 1998 and 2002, Wainwright estimates the city shorted the fund by $76.8 million.

Keep in mind that this means the rest of the shortfall was due to generous benefits hidden under faulty assumptions:

Providence is still solvent, but its pension system was just 25.8% funded as of June 30, 2017, with an unfunded liability that exceeds $1 billion.

So, skipped payments account for less than one-third of the missing money.  The other 700-some million dollars are a result of elected officials’ giving away too much in benefits and deceiving the public about the cost by gaming the actuaries’ calculations.  The key piece of that deception has been (and continues to be) the discount rate, or the rate of return expected on the investment.

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Both elected officials and labor union leaders (who often helped elect the people with whom they’re negotiating) haven’t minded understating the cost of government employees.  Both union members and taxpayers should be furious, but taxpayers shouldn’t be held liable for promises that they had no realistic means of preventing.

And as the bill comes due, we can be sure that the exploding tax bills and collapsing services will push taxpayers — including those collecting government pensions — somewhere that they don’t have to pay for it.



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