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.
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.
Just as appliance consumers need a practical guide for decibel levels, news consumers need a better sense of what pension return numbers actually mean.
In case anybody missed it, I’d like to highlight the following item from this week’s Political Scene in the Providence Journal:
Gov. Gina Raimondo has a new $61,751 staffer: RISD grad Jon Gourlay. His newly created job title: “Creative Manager — Governor’s Communications Office.” His actual role: producing web videos for Governor Raimondo, who is expected to run for reelection next year.
To some extent, her spokesman, Mike Raia, has a point when he says, “The way people get their information has changed, and elected leaders need to generate creative content to break through on social media and other digital and curated platforms.” The content of the videos will be the decisive tell, though.
If Rhode Islanders get short instructional videos about interacting with government or more-catchy-than-usual public service announcements, the governor’s office will have an argument. However, if we get more self-promotional trash like this, then the “21st century constituency” stuff will have proven to be just spin.
I know which way I’d bet, especially given what appears to have been a dud of a press conference from the governor, yesterday. Is Raimondo so thoroughly without political chips that she’s got nothing but words to salvage a budget containing her single biggest emphasis of the past year? She just doesn’t seem to get how to govern or use leverage and communications to bring about real action, so why would her new employee’s videos be dedicated to that purpose?*
* Before she actually became governor, Raimondo’s success with pension reform would have seemed to suggest otherwise, based on the “Truth in Numbers” campaign. As time goes on, though, that issue is looking more like a one-hit-wonder achievement, perhaps founded more on the promise that her mild reform would make the mammoth problem of pension funding go away. The clock is ticking toward the date at which the fallacy will be proven.
The bright side, if the bills that Ted Nesi summarizes for WPRI were to pass into law, would be a boom in gotcha-journalism stories about questionable disability pensions:
The first bill, sponsored by Providence Rep. Joe Almeida, would allow an “injury or illness” sustained on duty – rather than just an “injury,” the current wording – to be cause for the granting of a tax-free accidental disability pension to a police officer or firefighter. It would also increase how long officers have to file a disability claim from 18 months after the incident to 36 months. …
The second bill, sponsored by North Kingstown Democrat Robert Craven, would mandate that any firefighter who suffers from hypertension, stroke or heart disease will be “presumed to have suffered an in-the-line-of-duty disability” and therefore be eligible for a disability pension, unless there was evidence of the condition in his or her entrance exam.
When first published, Nesi’s story noted that the bills had been posted for votes, implying passage, but after his story went live, they were removed:
“They were posted prematurely,” House spokesman Larry Berman said in an email. “Both bills were on a preliminary list for possible posting and then were posted in error. Those two bills are still being reviewed.”
Even if it ends there, this episode is a good reminder that special interests (ultimately funded with taxpayer dollars) are constantly working the system to expand benefits for government union members at the public expense. They work to elect friendly officials to local office for generous contracts, and they work to elect friendly legislators to write generous benefits into the law.
Something dramatic and structural has to happen to change this, because our system has no countervailing forces short of bankruptcy that will withstand the year after year after year push. The embarrassment of hidden camera stories about retirees abusing their benefits will only go so far in restraining ever-more-unsustainable benefits from being bestowed.
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.
Trust in Trump (versus the elite), trust in intelligence gathering, trust in pensions and economic development, and trust in the police
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.
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.
Missing the kiss (and the point), teacher union fantasy, charity for them, and stuff for you
Open post for podcast.
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.
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.
The evidence continues to appear that government schools are drifting from their educational mission and toward left-wing indoctrination.
A gambler under scrutiny for having found ways to tilt the odds in his favor is a good metaphor for taxpayers who are never permitted to win in the rigged game that politicians, labor unions, and other special interests have built.
Even as progressive policies prevent Americans from improving their lives, they attempt to subsidize lifestyles that they find aesthetically pleasing to know that somebody lives.
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.
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.
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?
The RI Center for Freedom & Prosperity (among others) was able to pick out the problems with HealthSource RI and the state pension reform, while those in government had incentive to pretend impossible systems would work.
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.
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.
Ted Nesi’s weekly column misses an important distinction between what is good and what is bad about Rhode Island and goes too far in accepting state government pension spin.
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?”
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.
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.
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.
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.
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.
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.