Pensions RSS feed for this section
moneyclock-statehouse

RI Can Check Out Any Time, with Point Judith Fund, but Can It Leave?

Edward Siedle is wondering, in Forbes, whether the State of Rhode Island will ever be able to stop investing in Point Judith Capital, which our Democrat Governor Gina Raimondo founded, even as it loses money:

The pension was scheduled to exit Raimondo’s fund in 2016 but the firm, supposedly exercising its discretion under a secret agreement the state supposedly signed, unilaterally extended the life of the investment in 2017 and again in 2018.

In late 2018, General Treasurer Seth Magaziner surprised pension stakeholders by announcing a new reason for delaying termination of the investment yet another year. Magaziner disclosed, for the first time, the 2006 secret agreement the pension signed with Point Judith allowed Raimondo’s fund to hold onto state money another year if 80 percent of investors agree.

The very fact that an investment, shrouded in secrecy and foisted on the state pension by the now-Governor, has continued to lose money for the pension and pay money to Raimondo for the past thirteen years—with no end in sight—should demand enhanced disclosure and public scrutiny, in my opinion.

Of course, the line from the Eagles’ “Hotel California” echoed in this post’s title comes to mind.  But the situation seems more broadly representative of the crony, insider system that Raimondo has brought to full flower during her time in government.  A relative handful of people reap rewards while the public loses, and only the people benefiting are able to exit the relationship.

providence-featured

An Unexpected Suggestion to Fix Providence’s Pension Woes

To fix Providence’s pension fund, Mike Riley proposes a solution that might surprise some folks:

People dont Realize that Providence debt burden is the 3rd worst in the country. Raimondo and Elorza plan to pass this to State taxpayers. I say NO WAY !!@!!

This is Providence mess to clean up. They should impose a wealth tax to cut this number in half. Don’t tax us. Tax your own wealthy citizens who have elected Elorza and let him kick the can. Those wealthy people are dying soon so I would start imposing the wealth tax ASAP.

In addition the City should impose a real Estate Transfer tax of 50% on any Property over $3 million dollars that changes hands in the next 3 years or until the Pension Shortfall is < $500 million. These taxes , both the Wealth tax and the transfer tax, would be deposited directly into Providence Police and Fire pension plans.

One suspects the “tax the rich” approach is offered, here, mainly for educational purposes.  Riley’s drastic proposal is made in response to an F for Providence’s finances from Truth in Accounting.  Those who’ve watched Rhode Island finances will find a catch in that linked document:  namely, that just about every Rhode Island municipality faces similarly dire straits.

ERSRI-webbanner-featured

Learn This Lesson, Too, Rhode Island: Pension Returns

No matter how many times I observe its being done, I’m always disconcerted when a government press release spins devastating news as a positive:

The Rhode Island pension fund finished well ahead of U.S. and global stock markets in December due to the defensively positioned investments in the fund’s portfolio. …

In the 12 months ending on December 31, 2018, the fund returned -2.69 percent, compared to a passive 60 percent stock and 40 percent bond portfolio, which would have returned -5.52 percent.

The pension fund assumes an investment return (a “discount rate,” in this context) of 7% every year.  No matter how much better -2.69% might be from some arbitrary benchmark, it still means the fund came up short 9.69%.  To make up for that loss next year, the fund would have to achieve a 17.7% investment return.

This is the cycle repeated over and over again, and it’s time we all wised up enough that government officials would at least be embarrassed to spin it as a good thing.

monique-chartier-avatar

Fire the Providence School Bus Drivers’ Union

Justin says, “Fire the Providence School Bus Drivers”. Maybe. Fire their union, the Teamsters? Absolutely.

What Teamsters Local 251 are trying to do to the drivers – whose best interest they supposedly represent – borders on criminal. It WOULD be criminal if they had a fiduciary role with regard to their members’ retirement.

engaged-citizen-avatar

Michael Riley: Rhode Island May Have Dodged a Bullet, No Thanks to Our Treasurer

In assessing the effort to keep the PawSox in Rhode Island, it is important to review the role of General Treasurer Seth Magaziner. The state treasurer was asked to analyze the costs and opine on affordability, as would be expected with a large borrowing like this. Mr. Magaziner opined in October 2017 and in June 2018 as numbers changed along with the terms of the deal and then opined again recently, finally giving a nod to the deal.

But what everyone needs to know is that $350 million dollars in debt for Pawtucket’s other post-employment benefits (OPEB) for former employees was not used in his analysis. This is more than twice the city’s pension debt! In fact, it was purposely left out by Magaziner. Including OPEB debt would obviously have made the City of Pawtucket’s borrowing look dangerous and ill-conceived. Ignoring OPEB allowed for an outrageous abuse of taxpayer dollars by the treasurer.

Think about it.  Seth Magaziner violated his own risk recommendations by hiding a liability in his analysis; this is the type of stuff they did with 38 Studios. Mr. Magaziner owes it to taxpayers to lay all the cards on the table and not to fall in line with political winds. Had he actually laid the cards on the table, looked at all the debt, and been transparent and honest, the PawSox deal would appropriately have never seen the light of day.

As can be seen in the comprehensive Debt Affordability Study, Pawtucket already exceeds Magaziner’s limits for debt, along with Woonsocket and Providence, before even considering borrowing for the new stadium or the $350 million in OPEB liability, which the board is to reconsider as a component next year. This $350 million is so significant and overwhelming, it would be irresponsible for any treasurer to think Pawtucket absorbing new debt was a good idea.

justin-katz-avatar-smiling

Who’ll Pay for an Underwater Pension Mortgage?

Although some Internet sifting didn’t reveal their state-by-state list, leaving Rhode Island’s standing as an unknown, Rob Arnott and Lisa Meulbroek’s warning in the Wall Street Journal is worth consideration:

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

As I’ve noted repeatedly, government investment boards get away with unrealistic investment assumptions because their financial advisors and actuaries accept that the ability to increase taxes allows for higher risk, and Arnott and Meulbroek note that this power ultimately flows to one tax in particular:

State taxes are collected on four economic activities: consumption (sales tax), labor and investment (income tax) and real-estate ownership (property tax). The affluent can escape sales and income taxes by moving to a new state—but real estate stays behind. Property values must ultimately support the obligations that politicians have promised, even if those obligations aren’t properly funded, because real estate is the only source of state and local revenue that can’t pick up and move elsewhere. Whether or not unfunded obligations are paid with property taxes, it’s the property that backs the obligations in the end.

Thus, the authors say, the pension debt is like another mortgage on our homes.  (For Millennials with big education debt, it’s arguably a third mortgage.)

In some states, perhaps the resolution will weigh more in the direction of justice — hitting the honey pots of the politicians and labor unions that inflated this suffocating balloon.  In states like Rhode Island, though, we’d best come to grips with the reality that, more and more, we’re working for the benefit of the government, not the other way around.  What we owe on our government bill already far exceeds the value we derive, and that’s only going to get worse.

justin-katz-avatar-smiling

Keep that 8% Investment Return in Context

News of Rhode Island’s 8% return on its pension fund is being spread far and wide. Here it is in Chief Investment Officer:

The $8.3 billion Employees Retirement System of Rhode Island returned 8.03% for the fiscal year ending June 30, ahead of its 7.0% annual target, and its benchmark, which returned 7.5% during the same period.

Read on, though, and you see how inadequate this really is:

The fund also outperformed a traditional 60% stock/40% bonds portfolio, which would have earned just 6.25%. The fund also reported three-, five-, and 10-year annualized returns of 6.3%, 7.2%, and 5.8%, respectively, compared to its benchmark’s three-, five-, and 10-year annualized returns of 6.0%, 7.0%, and 5.6%, respectively.

The only number in all of these comparisons  that matters is the 7.0% “annual target.”  Indeed, this phrase is misleadingly minimizing.  Everything depends on hitting that number — even, arguably, the solvency of state government.  One wouldn’t say that having enough household income to pay the mortgage is an “annual target.”

In that context, 7% is really the zero line, and an 8% return on investment is really only 1%.  Moreover, the zero line has to be hit every year for decades.  So, every year that falls short requires multiple years of higher returns.  Over the past decade, the average annual return has been 5.8%, which is really more like -1.2%.

justin-katz-avatar-smiling

The Broad Story of Pensions

As is the publication’s wont, GoLocalProv’s coverage of the Diocese of Providence’s pension problems makes a play for a sense of scandal and therefore misses a bigger story in the lesson that it teaches:

The document is dated June 19, 2018, and marked “immediate action” and it calls for drastic cuts to beneficiaries of the fund. Also, to be considered at the meeting is the October 2017 recommendation document and the plan outlined is to be considered for action this week.

Another dire statement in the report says, “Even with the revised more realistic assumptions, if we make these changes, it will still take 30-35 years to fully fund the Plan.” …

The four primary reasons for the plan’s lack of stability have been conditions for years.  Catholic schools in Rhode Island have been closing for the last three decades, the 7.5 percent annual rate of return has not been considered achievable for the better part of a decade, and the major changes in mortality rates was achieved decades ago.

Note that the state of Rhode Island uses a 7.5% estimate for an annual rate of return, as well, and employees of the state have had the same changes in mortality rates.  The only difference is that state government can always raise taxes to pay its mammoth obligations.

My understanding of the history, here, suggests that the problems for diocesan schools are wrapped up with changes in government.  (This would make for a worthwhile research project for any students in an appropriate field who have the time.)  During the same broad time period that the Church could no longer rely on religious brothers and sisters to run its classrooms, government employees unionized, and the unions began manipulating the electoral system to ensure that compensation — including pensions — would rocket beyond an amount that could conceivably be afforded without the bottomless well of taxpayer dollars. Private schools have to compete in this general job market.

Intentionally or not, public sector pensions were designed to hide the actual cost of the benefit.  The system looked affordable, and the diocese offered a variation.  Simultaneously, an explosion of regulations and mandates for schools, specifically, increased operating costs across the board.

So, yes, there’s a reckoning coming for this error, but it isn’t only for the diocese.

justin-katz-avatar-smiling

Trading Water for a Fix

With his criticism of Democrat Governor Gina Raimondo for appointing Democrat Senate President Dominick Ruggerio’s son, Charles, to the Narragansett Bay Commission, Republican Mayor of Cranston Allan Fung has drawn attention back to the City of Providence’s perennial effort to turn its big water asset into a one-time payment, largely to infuse the city’s pension system with cash.

The immediate controversy is that Ruggerio, the younger, works in multiple roles as a lawyer for the city, but his appointment is most significant as a flash point to illustrate how government works, in Rhode Island.  The city has been after this for years.  In 2013, it took the form of an objectionable regional water authority.  Now, the strategy is to bring in the quasi-public Narragansett Bay Commission.

In every case, the goal appears to have been to come up with some excuse to saddle taxpayers and/or ratepayers with the additional burden of that one-time payment to the city.

Making matters worse is the general evidence that thinking about pension funds in this way is a mistake.  Just after the turn of the century, for example, the City of Woonsocket took on debt with the calculation that its investment returns would exceed the interest, and it could get its pension system on track.  That didn’t work out so well.

The Providence deal is different, of course, and would require a more thorough review prior to decisive pronouncements, but the impression one gets is that the primary difference is that the Woonsocket deal saddled the same people who owed the pension debt with the bond debt, while Providence is looking for somebody else to take on the new debt. Of course, Providence will also have offloaded an asset as a one-time part of the deal.

justin-katz-avatar-smiling

The Reason for Pension Shortfalls in Providence

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.

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.

justin-katz-avatar-smiling

Backwards Ownership in Government Spending

Sometimes one must be reminded how backwards some sectors have become, particularly when government is involved.  Consider labor union claims that they own a particular employer’s jobs.  Most people would say that, while holding it, a job belongs to an employee and, in general, is under the authority of the employer who created it.  In the union mentality, the outside organization that somehow managed to secure employee approval — often sometime in the distant past — rises above both parties such that the job belongs to the union.

Similarly, Democrat Governor Gina Raimondo’s old investment firm, Point Judith Capital, in a real sense appears to own the money the state unwisely invested with the company, as Kathy Gregg reports in the Providence Journal:

Point Judith Capital, the private equity firm co-founded by Gov. Gina Raimondo before she entered politics, has advised the state it intends to hold on to an under-performing Rhode Island pension-system investment for one more year, under the terms of a 2006 agreement. …

Over the span of the investment, the pension fund paid the firm $1,011,891, according to Magaziner spokesman Evan England.

The way the state treasury accounts for investments, England reported: Point Judith earned the pension fund 0.6 percent on average each year, and a total of $297,466.

So, the state has hired this company to earn money on a sizable investment, and instead, Point Judith has collected more from the state than it has provided in investment returns.  Yet, it is up to the company to decide whether the state can have its money back in order to find a contractor who can actually perform as expected.

Maybe it makes one an investment-world yokel to say so, but something just seems wrong about that. This sort of option may be very common, but why would the state accept it?

justin-katz-avatar-smiling

Selling Assets as a “Once and for All” Pension Fix Is a Bad Idea

Reporting on WPRI, Dan McGowan and Walt Buteau explain that Democrat Mayor of Providence Jorge Elorza is looking to sale of the city’s water supply as a means of filling the giant chasm of Providence employees’ pension fund:

Elorza, who is planning to run for re-election next year, said he’s seeking a “once and for all” solution to the city’s pension challenges.

 

As a general proposition, selling the water supply might or might not be a good idea, but this reason is horrible.  Just look to Woonsocket, which sold pension obligation bonds to fill its fund to 100% in 2003, but by 2011 was down to 57.7% funded.  The latest numbers on the Web site of the state Division of Municipal Finance put Woonsocket’s funding at 49.1%.

Unless a municipality fixes its underlying problems — such as overly generous employee packages and a more-realistic estimate for investment returns — every scheme will be a temporary fix.  In this case, Providence will have one fewer asset to help with unforeseen challenges in the future.

Even more, Elorza explicitly claims that another entity could run the system better because Providence is “so heavily regulated by the Public Utilities Commission.”  If that’s the problem, fix the PUC, and if Elorza thinks the PUC is little more than an expensive restriction, he should advocate for its abolishment. Otherwise, he’s just condemning those who drink and pay for Providence water to unnecessary expense (if the PUC is an excess) or unhealthy drinking water (if its regulations are actually needed).

By all means, if the city is having trouble running its water system, sell it off, but only if the new system is a better system of itself.  If a private company is willing to buy the water, it’s because there’s profit to be made (at least for employees), which indicates a problem with city management.  And if the money for the assets ultimately comes from the state, the whole thing will have been a one-time scam whose benefits for the city will rapidly disappear.

justin-katz-avatar-smiling

A Side Benefit of Giving Away Retirement Bonuses

Katherine Gregg notes, in a Providence Journal article, an interesting side effect of Democrat Governor Gina Raimondo’s plan to pay off long-time state employees to retire.  Gregg notes that the administration is assuming that 426 state workers will retire under the program, receiving $8.94 million in “retirement-incentive payments” and another $4.57 million in pay for unused time off from their years of employment.

[The plan] will also, coincidentally, turn state government into a hiring factory in the six months leading up to the 2018 elections.

So, heading into a statewide election for legislators and the governor, 426 union members will be happily flush with cash and another estimated 252 will have received seats on the state payroll gravy train.  That’s a nice little bonus effect of retirement incentives.

Of course, we shouldn’t accept the governor’s estimates.  Pushing employees into an underfunded pension plan may result in some near-term savings, but in the long term, it’s a terrible idea.  Taxpayer dollars go toward these pensions, and with people living longer and longer and government employees’ pay on ratcheting scales, we’ll only end up paying multiple people at a time for each job.

These sorts of buyouts are a bad idea when the idea is just to save money, and the impulse exposes a much more problematic fact of government.  Think about it:  If these employees are so far from worth what they’re being paid that we’ll give them bonuses up to $40,000 to get rid of them, why are we paying them so much in the first place?  If that’s not an indication that we need huge, systematic reform, then nothing is.

That point highlights the only time that buyouts might be reasonable in principle, which is when doing so is part of a system-wide fix.  But nothing is being fixed, in this case.  The governor’s just looking for a short-term budget trick that comes with some political benefit.

justin-katz-avatar-smiling

Cranston’s Disability Pension Funny Factory

This is hilarious… but unfortunately not so hilarious that Rhode Islanders won’t accept it or step up their laughter into a demand for change.  In Cranston, 69% of retired firefighters and 77% of retired police officers in the state municipal pension system have disability pensions, which are meant to provide the additional benefit of a two-thirds-of-salary, tax-free pension in compensation for some disabling injury on the job.

Of course, when the large majority of your employees receive enhanced benefits, they’re no longer “enhanced.”  They’re just the norm.

The funny part comes with Cranston union boss Paul Valletta’s explanation:

What could explain the difference [from other municipalities’ disability percentages]? There are no easy answers, although Cranston fire union chief Paul Valletta suggests that “bad luck” plays a role.

Valetta, readers might recall, was a visible presence in the successful push this legislative session to add “illness,” not just “injury,” to the language allowing a disability pension.  Everybody from the union activists to the Democrat Governor Gina Raimondo, when she courageously let the expansion become law without her signature, has insisted this is a mere correction to an oversight in the law.

That’s laughable.  To see why, consider that the law includes mental incapacity, as well as physical.  Allowing disability pensions for mental illness is clearly something broader than for mental injury.

The task of successful comedy writers — think Seinfeld — is to put characters in zany circumstances that seem like they really could happen.  It isn’t funny if it isn’t at least reasonably plausible with just a mild quirk of the character to make the difference.

The task of successful negotiation con artists is to make their special deals seem plausibly reasonable, with just the minor supernatural intervention of “bad luck” to explain what would otherwise be outrageous.  Bad luck, indeed… for Rhode Islanders.

Quantcast