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Political Monday with John DePetro: Connecting Political Dots

My weekly call-in on John DePetro’s WNRI 1380 AM/95.1 FM show, for November 11, included talk about:

  • The problem of public sector pensions
  • The value of the Fung brand for the Mrs.
  • Mayor Pete’s no-media, no-controversy event
  • Nanny Bloomberg and Gina’s RFP
  • No warning on the homeless transplants

Open post for full audio.

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How Much Union Members Are Paid, And How Much Taxpayers Can Afford

With the third highest property taxes in the country, a major encumbrance within an overall anti-taxpayer and anti-business climate that has dropped Rhode Island into bottom-10 rankings in a number of critical national indexes, the excessive costs of collectively bargained government services can be directly linked to this statewide problem.

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Local Pensions and the Labor Squeeze

A summary for Pensions & Investments of Rhode Island’s latest report concerning local pension plans passes a spotlight quickly past the ways in which government agencies, aided and abetted by labor unions, obscure the costs of benefits:

For the underfunded plans, assumptions about investment returns and payroll growth “may not be realistic,” said the report, which cited Providence’s 8% return assumption as the highest in the state.

“In more than a few cases … local pension liabilities are, or have the potential for, crowding out other important budget priorities.”

Take a look at the scorecard for Providence on page 22 of the report.  The plan is 26.3% funded, which means it would have to have about three times more money in the fund collecting investment returns right now in order to be solvent.  The city assumes that its payroll will only grow 3.5% per year, which must account for both raises and new hires.  It also assumes an unrealistic 8% return on its investments every single year, which means it can put less actual money into the plan each year, because it assumes more will come from investments than is likely.

To top it all off, Providence has more former employees collecting pensions than it has employees paying into the system.  Consequently, it pays out more every year than it adds to the fund, by about 4%.

Think about that.  The city’s pension fund is actually shrinking, not growing.

In order to buy labor peace, Rhode Island governments have made huge retirement promises.  So they don’t break the bank, they’ve then disguised the true cost with unrealistic assumptions.

That sword cuts both ways, though.  Because the pressure that the pensions should be applying to budgets is drastically understated, labor unions are able to push for bigger raises and benefits for active employees, which has crowded out the money for appropriate pension funding.  Now that accounting standards are making pension funding more visible and even mandatory, it has joined with other labor costs in squeezing the budgets for other expenses — even as prevailing wage and other union rules have ensured that the money for those other expenses cannot go as far as it should.

As the RI Center for Freedom & Prosperity’s new report on excessive labor costs shows, these and other problems are creating a huge additional burden on our state, which is already struggling to meet budgets while allowing its economy to grow.

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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.

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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.

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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.

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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.

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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.

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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.

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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%.

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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.

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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.

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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.

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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?

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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.

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