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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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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.

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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.

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Campaigning on Your Dime; Dud of a Press Conference

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.

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Expanded Disability Pensions Will Be Boon for Investigative Journalists

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.

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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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