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Mild Nod to Pension Reality Shows the Scam

You have to laugh (lest you cry) at the gimmicks of state government financing.  Rhode Island General Treasurer Seth Magaziner is preparing to lead the state Retirement Board in reducing the pension fund’s discount rate (that is, the assumed investment return) from 7.5% to 7.0%.  For the record:

The pension’s investments lost 0.27 percent in fiscal 2015-2016 and have gained 5.75 percent over the prior five fiscal years and 4.8 percent over 10 years.

Our investment assumption should be no more than 4.5%, because this assumption is supposed to be what we can reasonably guarantee the investments will yield.  Unfortunately, the pension fund’s assumptions aren’t really meant to help the state plan accurately; they’re meant to hide the real cost of benefits that politicians have promised to unionized employees.  As I’ve gotten Tiverton’s investment advisors to admit, the high investment assumption actually has built into it the willingness of elected officials to increase taxes down the road to cover shortfalls.

Notice, for example, that the treasurer’s plan delays increased payments for a year.  That’s a political concession, not a financial one.  Again, making the pension system work in the way that has been sold to taxpayers and employees is not the primary goal.  Helping politicians get away with bad management and crony deals is.

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The Measure of Debt in Rhode Island

The debt study put out today by the state treasurer’s office merits a more detailed look than I’ve been able to do today.  For the quick summary, see Ted Nesi’s article on WPRI:

The $10.5 billion in total public debt – excluding pensions – breaks down as $1.9 billion for Rhode Island state government, $6.6 billion for quasi-public state agencies such as Rhode Island Housing and Commerce RI, and nearly $2.05 billion for municipalities and local special districts. With pensions, the combined total rises to $17 billion, Magaziner’s office said. …

… The study suggests a community’s debt and pension liabilities should be less than 6.3% of its total assessed property value; in Providence that ratio is 17.8%, and in Woonsocket it’s 20.3%. Central Falls, Pawtucket, Johnston, West Warwick and Cranston are also above the target.

One question Rhode Islanders should consider is whether assessed property value really ought to be the measure.  Assets are certainly important to the question of debt, but mainly from the perspective of the lender, not the borrower.  For your mortgage, banks want to know your property value and other assets because they’re looking at the likelihood that you’ll be able to liquidate and pay them back if things go wrong.  That’s not really possible for a state (even “a state for sale,” as Rhode Island has been called).

From the perspective of the borrower, income is more important, because it relates to the ability to pay off the loan.  In that regard, we can look at the matter in two ways.  Rhode Islanders’ personal income (including investments) is about $44.5 billion, which means that even using the treasurer’s unrealistically sunny estimate of pension debt, government debt is about 40% the size of our income.  And of course, personal debt would come into play when thinking about personal income.

The second way to look at the public debt would be public revenue, and Rhode Island’s state and local tax revenue totals around $6 billion.  So our government owes about three years’ worth of revenue.

Each man woman and child in the state owes $17,000, around $68,000 for a family of four.  Whatever arbitrary benchmarks politicians may pick, that’s too high.

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Consolidating the Pension Problem for Whose Benefit?

Not that long ago, I might have been supportive of Rhode Island General Treasurer Seth Magaziner’s initiative to move the remaining municipal pensions into a group under state control.  Among the positives would be getting them all together so that Rhode Island could make a decision about how to resolve the problems once and for all and move forward.

I’ve shed a bit of naiveté since then, and information like this, from Ted Nesi’s WPRI article has disconcerting undertones:

Magaziner emphasized that the proposal does not involve putting state money into the local pension plans, and said allowing them into MERS would not impact the funding of plans that are already in the state-run system. He also suggested joining MERS could force communities to be more responsible about making their annual required pension contributions.

“There are some pretty strong sticks to get communities to be responsible” in MERS, he said, such as withholding state aid or taking legal action if they fail to make their contributions.

This means the state will pressure municipalities to raise taxes as pensions prove to be unfundable through reasonable payments plus investment returns, which is almost certainly going to happen.  The bill will go up, and local governments will turn to voters and say, “We have no choice.  The state is making us pay more toward pensions.”  This will defuse some of the local push back, both on pension payments and the deals being offered to active employees.

Meanwhile, the looming catastrophe at the state level will be that much more threatening, and compromises on the employees/pensioners’ side will come later (meaning the promises will be bigger).  In short, my thinking is increasingly that, as with most budget items, the more local the decisions and the pain can be, the better.  The people paying the bill have a more-fair hand locally (if only slightly), and if one municipality slips into the abyss, the others may have time to work out their problems based on that lesson.

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Don’t Let Them Treat Pensions Like a Force of Nature

Ted Nesi captured a broader point with this item from his weekend Nesi’s Notes column:

[Pawtucket Mayor Don Grebien] pushed back at House GOP Leader Patricia Morgan’s argument that cities and towns should have to find savings to cover part of the $220 million tab to eliminate the tax. “That’s old-school thinking, that we haven’t done a lot of those things,” Grebien argued. His office points out that 94% of the growth in Pawtucket’s city-side budget over the last decade, about $12.4 million total, has gone to cover retiree benefits – leaving just $825,000 more to spend on everything else.

One must chuckle at a politician trying to act as if the state and municipalities have done all of the possible belt tightening and looking for more is “old-school thinking.”  Anybody who falls for that line deserves to continue to have his or her bank account raided by the looters.

But the bigger notion worth highlighting is that retiree benefits are some sort of natural occurrence that ought to be excluded from our conversations about budgets.  Robert Walsh, of the National Education Association of Rhode Island, attempted something similar during his appearance on Rhode Island Public Radio’s Political Roundtable Q&A when he tried to make it seem as if Rhode Island spends a great deal less on education than Massachusetts because of the different ways pensions are funded in the two states.

This is an old non-truth that I exposed in 2015, but my point here isn’t that Walsh’s statement was wrong (and he probably knows it).  Rather the point is that pensions are a part of our government spending — demanded by unions and supplied by politicians.

Of course, insiders want to act like all of their spending habits are off the table, but we should rebuff them when they try.  If you want more spending change your pension benefits.  The way actuaries figure out what governments owe means that lowering the promises being made now affect the funding required now.  We still won’t be able to afford it in the long term, but at least other priorities would have some space for now.

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Appropriate Context for Retiree Complaints

I’ve been surprised to find my opinion of the Providence Journal commentary pages falling under the editorship of Ed Achorn, but this is a terrific editorial note following a letter to the editor by a retiree in the state pension system, in which she complains about the unfairness of limited cost of living adjustments (COLAs):

The writer retired at 58 from the Bristol Warren Regional School District as a secretary, then went to work in the private sector for 11 years.

The context is especially relevant because in the letter Kathleen Moran insists: “If the governor has money to pay for tuition for students, who as well as their parents, are able to work, she should pay retirees COLA, as some are not able to work.”  To fill in some details, Moran retired in 2000 having contributed all of $22,011 toward her pension, and by the end of the 2014 fiscal year, she’d already collected $227,538.  That is, she was coming pretty close to getting back her total investment every single year.

Now, I don’t support the tuition plan, but mainly because Rhode Islanders shouldn’t succumb to the ideology that says government is their way to take what they want from other people.  Indeed, we’re overdue to get fed up with the sense of entitlement among those who already hold that belief.

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Discount Rate Assumptions and the Certainty of Tax Increases

After years attempting to interpret public documents related to pension funds to understand the method of deciding what a reasonable investment return assumption would be, I finally have it straight from a municipal investment advisor. As I’ve posted on Tiverton Fact Check:

Me: So if a town comes to you and says, “We want to hit this number,” you say, “Well, what’s your risk?,” and that’ll play into seven-and-a-half percent.  The fact that the town can then in 20, 30 years increase taxes to make up for the loss, then you have a little higher tolerance for risk, so you can go up to 7.5%, which you may never hit, but in the end of 20, 30 years, you’ve got other assets — taxpayers — you can take money from.  Is that part of the conversation?

Gene McCabe, Director of Investments for Washington Trust:It is.

In the not-too-distant future, I suspect it’ll become unreasonably expensive for us municipal assets.  Elected officials and government employees should start pondering what will happen when assumptions about how much money can be confiscated from Rhode Islanders prove as fanciful as assumptions about high returns at the stock market roulette wheel.

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How a Pension Discount Rate Deceives the Public

Over on Tiverton Fact Check, I’ve used Tiverton’s police pension as an example to show how the high assumptions for investment returns work to give taxpayers a false sense of security:

The problem is that 7.5% is a very high return to hit every year.  According to the latest actuarial report, Tiverton’s pension fund lost$332,601 last year, which is about -3.4%.  In other words, because we needed a 7.5% increase, we were 10.9% short.  Tiverton should havestarted this year with another $1,065,971 or so in the bank.

Investment professionals will tell you not to panic, because we have to expect the market to go up and down, and what’s important is the average over years and decades.  One bad year is not the end of the world, and during the three years prior to this loss, Tiverton beat its 7.5% every year.

Two things make this picture too bright.  The first is that 0% isn’t the break-even number in this calculation — 7.5% is — which means every loss is huge and every gain is smaller than it seems. The second is that coming up short one year means there’s less in the bank to invest the next year, so the gain the next year has to be even bigger.

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Public Service, the Job That Keeps on Giving

If you follow Rhode Island news at all, you’ve heard that State Police Colonel Steven O’Donnell has opted to retire from his job leading the agency.  For the purposes of this post, let’s stipulate that the state government should be sorry to see him go after 30 years as the type of employee — “public servant,” as big-government types like to phrase it — whom we should want in key positions.  Still, this caught my eye, particularly in light of the fact that O’Donnell is 56 years old and says he’s “currently seeking opportunities in the private and/or public sector” (emphasis added):

Twenty-three of O’Donnell’s three decades in law enforcement have been with state police. His pension will be $101,391 annually, said Frank Karpinski, administrator of the state retirement system.

Currently, O’Donnell makes around $150,000 per year, and if he lives to be 86, he’ll take in over $3 million in pension payments, even if he never receives a cost of living adjustment (COLA), while also spending some significant portion of that time working jobs that presumably will pay commensurately with his experience.

Being unable to find information on O’Donnell’s pension through my usually pretty comprehensive sources, I began asking questions of the Employee Retirement System of Rhode Island (ERSRI).  Here are some things that I’ve learned:

  • The $101,391 is for his work for the state, only.  If he’s entitled to anything for his brief time with the North Kingstown PD or the U.S. Marshall service, that would be additional.  (I’m looking into those two angles.)
  • After his time with the Department of Corrections, O’Donnell withdrew his contributions to the pension fund.
  • Colonel O’Donnell contributed nothing toward his state police pension.

That final point means that his potential 30 years of pension payments can in essence be added to his 30 years of public-sector salaries as something akin to a delayed annual bonus.  In Rhode Island, the question is never far from the surface:  Who are the masters, and who are the servants?

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Climate Change as an Excuse to Turn Government Against the People

Kevin Mooney has picked up, for The Daily Signal, the story about an open-records-related lawsuit against Rhode Island Attorney General Peter Kilmartin.  In brief, Kilmartin’s office has signed an agreement to work with other attorneys general and environmental activists to target companies and organizations on the other side of public debate about climate change and related public policy, with a further agreement to keep the larger agreement and correspondence secret.  One problem with that:

If Kilmartin and the other attorneys general prevail in the deal to keep select details secret, the ordinary citizen will be the loser, Chris Horner, a leading critic of climate change orthodoxy, said.

“It will mean that they can create privilege for what are otherwise public records, even when shared with ideological activists and donors, so long as everyone who wants to keep their scheming secret agrees in advance,” Horner told The Daily Signal.

That’s not the only way for government officials to keep things secret.  I’ve been writing about the efforts of the Employee Retirement System of Rhode Island (ERSRI) and General Treasurer Seth Magaziner to withhold from me the total amount of pension promises to which the state is committed, efforts in which the attorney general’s office is now involved.  In that case, the state government is making the ludicrous claim that, because a private actuary has the data, might have to perform a simple calculation, and might charge some price to produce the results, getting it would implicitly be an “undue burden,” thus creating an exemption from the law.  That is, even if the costs would be small and the people requesting the information were willing to pay the fees, public agencies do not have to release public information as long as they use an outside company to process it.

With that massive loophole in mind, turn to an essay from May by Hans Von Spakovsky and Tiger Joyce.  As part of this very same effort of state attorneys general to go after political opponents in the name of climate change alarmism:

Some state attorneys general are hiring profit-seeking, private-sector personal-injury lawyers to do their legal dirty work. Moreover, any contingency fees collected by these lawyers through settlements arising from these cases could be used, in part, to fund the campaigns of allied politicians who embrace the “one, true belief” of man-made global warming.

Unfortunately, the Department of Attorney General does not appear to be included in Rhode Island’s transparency portal, so there’s no immediate way to dig into Kilmartin’s expenditures with private firms, but even if the state has not yet reached the point of paying hired bounty hunters to track down those lawless climate change deniers, we can certainly include this whole corrupt effort on the list of ways in which government at the state and national levels has left the road along which the people can safely feel as if they are legitimately governed.

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Belling the Taxpayer Cat

In Aesop’s fable about the council of mice, a colony of murines gets together to figure out what to do about the household cat, which is obviously an impediment to their comfort and happiness.  A young mouse suggests that they place a bell around the feline’s neck, and then they will always have warning as it approaches.  The council agrees that it is a brilliant idea until an old mouse hobbles forward and asks who is going to bell the cat.

We can safely assume that Aesop did not have public-sector pensions in mind when he wrote his fable some two-and-a-half millennia ago, but the moral of the tale clearly applies to the situation that George Will describes in Illinois and across the country:

Illinois is a leading indicator of increasing national childishness — an unwillingness to will the means for the ends that it wills. Nationally, state and local governments’ pensions have somewhere between $1 trillion and $4 trillion in unfunded pension liabilities, depending on, among other things, assumptions about returns on pension funds’ investments. The Wall Street Journal reports that in 2001, the 20-year median return was 12.3 percent, and every percentage-point decline in returns increases liabilities by 12 percent. Last year, the largest fund, California Public Employees’ Retirement System, which assumes 7.5 percent returns, instead gained 0.6 percent. This, in the sixth year of the recovery from the 2008–09 crisis, was the worst performance since then — and another recession will surely happen.

Nationally, neither party is eager to talk about the rickety structure of the entitlement state, although the Democratic platform promises to make matters worse. Although scheduled Social Security benefits vastly exceed the value of worker and employer contributions plus interest, the platform, a case study in reactionary liberalism, opposes even raising the retirement age. This, even though benefits are available at 62, three years younger than when the system was created in 1935, when life expectancy at 65 was 12.5 years. Today, it is 19.3 years for men and 21.6 for women. If in 1935 Congress had indexed the age of Social Security eligibility to life expectancy, the age today would be 72.

The council of big-government mice has concluded that the brilliant solution for maintaining the support of powerful labor unions and for gathering the votes of the older citizens who are most inclined to head to the polls and the poor who not only may be driven to the polls, but also make for compelling guilt-trip propaganda, is simply to proclaim payments to them.  So far, they’ve gotten away with pretending that these unsustainable systems will continue to work indefinitely, but they do not wish to acknowledge fiscal reality, much less bell the American people with more taxes.

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Pensions and the Telltale Signs of a Scam

Yesterday, I mentioned the difficulty I’m having getting the state government of Rhode Island to give me a basic number in its actuary’s pension calculations.  Granted, it’s a number that doesn’t technically appear in the actuary’s formula, but my request was basically: “What happens if you add those numbers (which you’ve calculated) together before you reduce them based on investment returns, not after?”  

A post on The American Interest (via Instapundit) suggests that my experience is actually part of a nationwide effort to disguise the full extent of public-sector-pension promises.  The author draws attention to news that the American of Actuaries and the Society of Actuaries have buried a task force report looking into pension funding and opines:

There are powerful interests that don’t want public pensions to be governed by the same kinds of accounting principles used in the private sector because… well, because if they were, public pensions would go from seriously underfunded to catastrophically underfunded.

Union officials and state legislators (in both parties) seem to believe that it makes more sense to allow public pension funds to play “let’s pretend” with public money. To be sure, the sudden imposition of a tougher standards would cripple business as usual in many state and local governments, so there can and should be some reasonable accommodations made to allow the adjustment to take place in a less disruptive fashion. Governing by catastrophe is almost never a good idea, and a series of small and incremental changes is usually (though not always) a better way to manage public affairs.

This problem is going to come back and bite us, and people are beginning to suspect that a large number of issues suffer from the same sort of dishonesty.  As The American Interest closes by musing, “Is it any wonder that Americans are fed up with experts and the institutions they manage?”

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Marching Right Back to Crisis with the Pension Fund

Who could have guessed that Rhode Island’s pension fund would prove not to be fixed as promised after the much-applauded pension reform pushed by Democrat Governor Gina Raimondo when she was the state treasurer?  From today’s Providence Journal:

The Rhode Island state pension fund lost $466 million over the past fiscal year, declining from $7.96 billion in assets to $7.50 billion, or 5.9 percent.

It was the second consecutive year that the fund lost money because the payout of benefits exceeded the return on investments and contributions from taxpayers and employees, according to David Ortiz, director of communications for Rhode Island Gen. Treasurer Seth Magaziner.

The market value of investments in the fund for state employees, public school teachers and some municipal employees also fell, by $26 million, or 0.27 percent, in the fiscal year ended June 30.

A point that Gregory Smith doesn’t make in his article, but that is absolutely critical, is that the pension fund is financed with an expectation of a 7.5% return on investment every year.  That means a $26 million loss, versus breaking even, is really nearly a $500 million loss versus where the investment needed to be.  The article goes on to note that other states’ pension funds made small returns, below 2%, but even that isn’t good enough.  Even that should be seen as a loss.

This is why I’ve been attempting to learn the total benefits that the state has already committed to funding, without adjustment to put it into today’s dollars — that is, without reducing it by the estimated investment return.  The state pension agency (the Employees’ Retirement System of Rhode Island, or ERSRI) and treasurer refused to give me that number, saying the actuary (a private contractor) doesn’t even do that calculation, even though it should be a very simple calculation to do.  Last week, the attorney general’s office backed the pension agency up, although the lawyer is revisiting the decision because he somehow missed a letter I’d submitted that directly refutes the agency’s reasoning and, therefore, his.

I’ve also now requested all of the numbers that the actuary does calculate, and I will simply add them together to get the total.  ERSRI, however, has refused that request, too, insisting that the only way a member of the public can get the number would be to take the raw data and essentially repeat all of the actuary’s work.  This one I may pursue all the way into the court system, because it’s a matter of basic transparency and the rule of law, because the public records statute very clearly requires release of this information.

It’s also critical to the state’s finances.  If our pension fund cannot even achieve positive returns, let alone returns anywhere near the estimated rate, the taxpayers and voters have a right to know how much money we’re talking about.  The reason elected and appointed officials wouldn’t want us to have that information is obvious.

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OPEB: Another Hole and a Proof of Problem

This Patrick Anderson article about Rhode Island’s liability for other post-employment benefits (OPEB) for employees shouldn’t slip by without notice for two reasons.  First, OPEB is another drain on the budget, which already limps along from year to year in structural deficit:

Rhode Island needs to contribute $60.7 million toward non-pension retiree benefits, primarily health insurance, in the budget year starting in July 2017, the state’s actuary said Friday.

That FY2018 contribution was approved Friday by the Other Post Employment Benefit Board, the panel that oversees health insurance liabilities for retired state employees, teachers, judges and state police officers.

Perhaps more significant, though, is the teachable moment arising from the math involved:

The OPEB trust fund assumes a 5-percent annual investment rate of return and made 9.2 percent in 2014, then 7.8 percent in 2015, the report said.

Why should the OPEB trust fund assume a 5% return when the pension fund assumes 7.5%?  To be more clear-eyed than cynical, the reason seems likely to be that 5% is more realistic (although still at least one percentage point too high for an assumption that’s supposed to be a sure thing), but the state’s politicians and other insiders simply couldn’t withstand the reality of a more responsible investment plan.

Then-Treasurer Gina Raimondo kicked off her pension reform initiative with the “crisis” created by lowering the return assumption by just half a percentage point.  Lowering it another 2.5 percentage points (let alone 3.5) would make it absolutely plain that the state government has been hoodwinking the public (and its employees) and faces either a huge tax increase, a huge benefit reduction, or a huge elimination of other services.

We shouldn’t delude ourselves.  The bill is coming due, and the longer we allow the state government to put off acknowledging it and addressing it, the more painful it’s going to be.  Unfortunately, the people whose elected or appointed jobs are to keep the state running smoothly are almost certain to let the irresponsibility drag on in the hopes of either a miracle or a path to quietly impose higher taxes on us, either through our state taxes or our federal taxes.

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The Pension Disaster Will Be Addressed

Springboarding from the woes of California’s public-sector pension problems, The American Interest suggests that it might be too late to avoid some sort of crisis with such pensions across the country:

This long-running failure of governance may be irreversible. All that’s left for state governments to do now is reform pension systems for new employees, phasing out defined-benefit systems for 401(k)-style plans, and, where possible, trim benefits or raise contribution requirements for current workers. In the meantime, federal policymakers should start thinking about a reform-for-relief framework that will enable states and localities to honor their obligations to retirees while getting their finances back under control for the long haul.

We should consider it evidence of the extent of the problem that the generally wise American Interest falls back to the irresponsible cop-out that the federal government ought to step in and make the problem go away — as if the feds aren’t already headed toward dozens of trillions of dollars in debt absorbing every other bad policy decision made throughout the country over the past century.  That is, pensioners relying on the writer’s solution would have to hope that none of the other myriad problems and looming crises comes to a head and absorbs the nation’s very last tolerance for debt before the pension problem.  (My wager is that the multiple crises will cascade into one uber crisis.)

If the idea of the government takething away the pensions that it gavethed is inconceivable, peruse the ruling issued this week by Rhode Island Superior Court Judge Sarah Taft-Carter (internal citations removed):

It was clear that to avert disaster the City had to act. (p. 11)…

Notwithstanding a finding of substantial impairment, a contract modification remains constitutionally valid if the City produces sufficient credible evidence that the modification was done to further a significant and legitimate public purpose and if doing so was reasonable and necessary. (p. 30)…

… the Court is satisfied that the City has produced sufficient credible evidence through the testimony of Mayor Fung, Mr. Strom, and Mr. Sherman that the Great Recession, the decline in state aid, and RIRSA’s requirements created an unprecedented fiscal emergency neither created nor anticipated by the City. (p. 34)

Taft-Carter affirmed that cities cannot be expected to raise taxes indefinitely, and unless I missed it, she didn’t so much as speculate that the state could be forced to intervene.  The same will prove true up the scale, all the way to our giant national blob of debt.  At the state level, one could imagine a judge considering something like my argument about the flight of the “productive class” as evidence that higher taxes would accelerate a death spiral already underway.

For those who think the same couldn’t happen at the federal level, one can only suggest that they not take the risk of finding out.

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The Minimum Debt Load of Rhode Island: $16 Billion

Just for fun (come on, you know you do it, too), I thought I’d go through the audits for the State of Rhode Island and the cities and towns contained therein to total up the amount of debt.  The exercise wasn’t intended to be comprehensive, so I just grabbed, as well as I was able, the long-term debt or liabilities from each government’s statement of net position (including the current portion for long-term liabilities).  The numbers therefore capture pensions, other post employment benefits (OPEB), bonded debt, and other ways in which a town, city, or state can owe somebody money.

The numbers therefore are extremely conservative.  The incentive, for governments, is to minimize the amount of money that it looks like they’re spending, and truly cutting through the methods for answering that incentive would be a very significant project.  One notes on the audits, for example, that some portion of pension debt is calculated as a “deferred outflow” rather than a liability, and so would not be included; in Cranston, for example, the deferred outflow for pensions is $36.6 million, while the liability is listed as $1.5 million.  (There is typically a deferred inflow, too, but even subtracting in from out tends to produce a greater liability; $1.8 million in Cranston.) Remember, too, that the calculations that government auditors use to figure pension and OPEB liabilities can underestimate a more-realistic assessment of liability by four or five times.  Oh, and none of this includes other government units that might not fall under these specific audits, such as fire and water districts.

Consequently, the $16 billion total that this method produces is pretty much the absolute minimum that governments in Rhode Island have saddled residents with.  Using the latest U.S. Census data provided by the state Dept. of Labor and Training, this comes out to $15,180 for every person in the state, or 27.3% of the total annual income of Rhode Islanders.

If you want to darken your financial picture, for some reason, add that amount to the $154,000 or so each of us owes for the federal debt.  Then factor in entitlement programs like Social Security and Medicare… and don’t forget to adjust everything up for accounting gimmicks and understatements, as with pensions.

In short, the $16 billion of acknowledged debt in Rhode Island is just the tiniest tip of an iceberg of hopeless proportions.  Don’t fall for the distractions, either: The bill is going to come due, and somebody is going to get shafted.

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Better to Learn the Pension Lesson Sooner than Later

One could almost say that any pension reform that doesn’t reduce the promises that have been made is ultimately either a sidestep or a backslide toward forcing taxpayers to absorb all unfunded pension debt.  This Washington Post article brings that thought to mind:

The Pension Benefit Guaranty Corp., which insures private pensions, is dealing with long-standing financial woes with the fund that protects multi-employer pension plans. The program, which some experts say wasn’t really intended to be used, was set up more than four decades ago to serve as a backstop for private-sector pension plans. But it has been relied on more than expected by large plans on unsteady financial footing.

Look, the writing has been on the wall a long, long time concerning pensions.  Any step that’s been taken to provide insurance or a “backstop” for the mathematically impossible promises not only delays a final reckoning, but also dilutes the incentive for employers and employees to view pension benefits with the appropriate level of realism.

We’re letting corporations, unions, and the government set up just these sorts of dominoes throughout our economy and our culture, and it has to stop.  The bill is going to come due, and the more intricate ways we contrive to make people think that they won’t be shorted, the more we make dishonest, unrealistic accounting a core feature of our entire society.

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Common Ground with the Pensioners

In keeping with my ongoing quest to find common ground with everybody on all sides of every issue (hey, scarcity isn’t always evidence of a lack of demand), this part of Mark Patinkin’s column recounting his visit to John DePetro’s anti-Raimondo rally, jumped out at me:

Then there was Ed Mitsmenn, 57, another retired prison guard who lost his COLA. His hands were shaking and he told me he’s come down with Parkinson’s and almost lost his house because of health-care costs and his pension cutback.

“I see they have money for this and money for that,” he said, “but they took our COLAs away.”

There can be no doubt that one of the looming big stories of Rhode Island’s near-to-mid-term future is that pension promises are going to have to be reined in considerably.  The promised benefits are just too unrealistically huge for the state to be expected to cover them, and the fault for this reality lies squarely with labor unions and friendly legislators, who have conspired to saddle taxpayers with a bill to come do well into the future, and the union members who have been content to keep the scam going in their favor.  Eventually the future arrives.

But… as Mr. Mitsmenn suggests, there are hundreds of millions of dollars (perhaps more than a billion) in more-immediate spending reductions that ought to occur before the state figures out what kind of hit pension plan members are going to have to take.

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Correcting the Treasurer

While dropping off a child’s forgotten lunch box, this morning, I heard John DePetro replaying a segment of this weekend’s Newsmakers program interviewing Rhode Island General Treasurer Seth Magaziner.  Responding to observations that the state pension fund’s investments are treading water or even losing money, Magaziner repeatedly insisted that the proper time frame over which to consider investments of this sort is the “long term,” and in that regard, the fund is on the right track.

This is not true, and journalists shouldn’t let him get away with the lie anymore.  As I’ve written before, if you define “long term” as any time longer than five years and shorter than 30 (which is far back as I’ve seen data), the fund is not on the right track.  The reality is that Magaziner, like Gina Raimondo before him, has a small window during which a “long term” view of about five years makes it look like the pension fund is viable.

Starting the measurement at the bottom of the housing bubble crash and carrying it through a few years during which the federal government and Federal Reserve were inflating stock values makes it look like the pension fund could actually earn 7.5% returns every year, on average.  The idea that such returns could be maintained for decades is so inconceivable that politicians like Magaziner must be relying entirely on the reluctance of people to investigate their claims.

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Tom Ward Calls Out Potentially Costly P.C. Bullying by State Treasurer

Echoing (presumably inadvertently) Justin Katz’ similar reservations about the General Treasurer’s “foolish politically correct showboating” with the state pension fund, Valley Breeze Publisher Tom Ward offers an excellent critique of the GT’s recently announced, very foolish new criteria for the choosing of investments for the state pension fund.

By choosing investments based on feelings and a political agenda, isn’t it possible that the fund won’t do as well as those which focus specifically on making as much money as possible for retirees? Or are we saddled with investment managers whose PC agenda is more important to them because taxpayers have to make up for their poor performance anyway?

Great point. It’s so easy to make yourself look good and claim the (highly dubious) mantle of political correctness when someone else will be forced to make up the difference financially. But it may not just be taxpayers who would have to do so. Presumably, Mr. Magaziner will make himself widely available to state retirees facing a potential haircut to explain to them how being p.c. was more important than the intactness of their pension check.

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Solutions Offered for Providence’s Financial Problems are Too Revenue Heavy

Well, one thing’s for certain: it’s getting pretty serious in Providence financially judging by the study commissioned by Mayor Elorza and the solutions it contains.

Providence should consider implementing new taxes, selling assets and closing fire stations as part of its effort to reduce a projected structural deficit that could balloon to $37 million over the next decade, according to a study released Monday by the Elorza administration.

The problem, unless WPRI’s Dan McGowan left significant chunks of the study out of his report (quite unlikely), is that the study offers way more suggestions for raising revenue – sell assets, raise PILOT payments, create new taxes and fees – than for reducing spending. The proposal to “transfer city janitorial services to a prisoner reentry program” is welcome – but only seven FTE’s would be affected. Where is the proposal to look at compensation levels across the entire city payroll? Yes, the study suggests broadening the suspension of the pension COLA – but doesn’t mention the pensions themselves. This would clearly be inadequate as the city’s pension fund is at best 30% funded.

Tax rates in Providence, residential and commercial, are already among the highest in the country. When are Providence officials going to start taking steps to live within a budget that TAXPAYERS can afford rather than continuing to take the easy steps of only nibbling around the edges of expenses and continuing the inexorable increase of taxes and fees?

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Magaziner Exemplifies State’s Skewed Priorities

One can just about sympathize with Democrat General Treasurer Seth Magaziner.  When taxpayers across the state are complaining on talk radio that the tax return checks with his name on them seem greatly delayed and when the pension fund under his control is actually losing money, the politician must feel an intense pressure to come up with newspaper headlines that somebody might see as positive:

On Wednesday, Rhode Island Gen. Treas. Seth Magaziner announced a new policy that seeks to use the proxy-voting power that comes with Rhode Island’s billions of investment dollars to encourage companies to place more women and racial minorities on their boards of directors.

Unfortunately, many people fall for foolish politically correct showboating.  Heretofore, the state’s index-fund manager, State Street Corp., has done the voting to which Rhode Island’s investments entitle the state.  Presumably, State Street’s votes have been cast with an eye toward maximizing returns on its clients’ investments.

But maximizing returns is clearly not the priority of Rhode Island’s chief fiduciary, Seth Magaziner.  Worse still, not only does Magaziner acknowledge that Rhode Island’s votes may make little difference, but the method by which it will cast them is hot-pan-on-a-silk-tablecloth dumb:

“Any time a man is nominated to be a director at a company where fewer than 30 percent of existing directors are women (or racial minorities), we will vote no. If we end up voting no at a high rate, we will be making an important statement on the financial materiality of board diversity,” Magaziner said.

No individual consideration.  All that matters is body parts and skin color.  Of course, I’m making an assumption, there; Providence Journal reporter Kathy Gregg didn’t ask Magaziner if the vote will be cast according to biological fact or by the personal assertions of the nominee.

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The Perks of Misbehaving Under Public Employ, Cranston Edition

Annie Shalvey has one of those follow-up stories, on WPRI.com, that really leaves a taxpayer shaking his or her head.  Where else but on the government payroll is it possible to be a key figure in a significant abuse-of-power scandal and wind up with this reward:

  • More than two years of paid leave (i.e., vacation), including raises, making more than $100,000 per year
  • Ability to cash in unused paid time off in order to reach a higher tier of pension benefits
  • Retirement income and other post-employment benefits

The recipient of those perks of public employment was Police Captain Stephen Antonucci, and readers should not mistake my critical review of the State Police report about the controversy surrounding him with sympathy for its targets.  At this point, though, what Rhode Islanders should really keep in mind is the incentive structure that their elected officials have created.  Note:

Eyewitness News spoke with Councilman Paul Archetto – whose ward was one of two blanketed with tickets.

“I think had Captain Antonucci just manned up to what he did and came clean, he would have gotten a letter of reprimand and maybe a demotion to lieutenant and he probably would have still been working for the Cranston Police Department,” he said.

One can’t help but wonder whether a man in Antonucci’s position would even want to keep working.  During a couple of years of very high pay, he was able to work political and legal channels, and even then, “defeat” is a long vacation followed by a nice little cushion for whatever he decides to do to finish out his working years.

When handling their employees, in other words, our elected officials have left themselves (and us) with very little leverage to achieve fair outcomes that send the right signals and maintain proper incentives.

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Riley Urges SEC to Return to Rhode Island

If the state’s 38 Studios bonds were fraudulent in the SEC’s eyes because important information was omitted from the bond tender, what about Providence’s municipal bonds? This is Michael Riley’s interesting point in today’s GoLocalProv.

Last year, Segal Consultants confirmed the Providence Pension Plan had been overstating the assets in the Pension Plan for years. Segal itself warned 18 months prior of the unusual accounting that “overstated” pension assets and the pension funding ratio. …

I am asking the SEC to clarify the “Assets” in the Providence Pension plan. Since I do believe that Providence has been illegally borrowing from the pension plan, and that the assets labeled “other” are essentially an IOU, I am also asking about the timing and approval of these “loans” and whether the City of Providence owes interest on “loans” going back at least 12 years.

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