With my second fortunate parking experience in Providence this week, having found a parking meter that was already almost at 2 hours time, I’ve settled in for a rousing discussion of municipal pensions at Brown University’s Salomen Center, hosted by the Taubman Center for Public Policy.
About two dozen and a half folks in the audience. Professor Marion Orr is introducing the conference.
Describing the pension problem, Orr puts the price tag at $7 trillion. That’s actually a bit higher than I’ve seen.
Professor Theresa Devine, who is moderating, is introducing the panelists: Robert Clark, Joashua Rauh, and Eileen Norcross.
Clark is giving a history of public pensions. They didn’t fully kick in until the end of the 1800s, mainly because public jobs were patronage jobs and only lasted as long as the career of a given elected official.
1911 saw the first state pension, in Massachusetts.
By 1928, police and fire pensions were “practically universal.” Most plans were badly funded and had long vesting periods, but there weren’t a lot of defaults, because they were run kind of like pay-as-you-go systems.
Historically, military pension plans began the trend, followed by other government workers. The 20th century saw expansion.
It’s interesting to note that teacher pensions tend to be state operated.
The tendency is for local plans to aggregate up to the state level.
The tendency has consistently been: during good economic times, governments grant benefit increases (without necessarily adding contributions), while during bad economic times, they shirk on payments. Clark: “You see them promising things they’re not necessarily willing to pay for.”
Most plans, he says, have provisions that allow employees to retire with full pensions at relatively young ages. “Maybe there’s some occupations where we’re worried that people are too old to work,” but the general government worker could perhaps work a bit longer, he says.
Clark phrases the pension questions that we currently face as conscious decisions for the public to make: Do we want to be unfair to young workers, who if they’re mobile and leave don’t get any real benefit? Do we want older workers retiring in their 40s and 50s?
Joshua Rauh is now up to talk about “debt in disguise.”
He says 92% of economic policy experts believe that pensions represent a catastrophe waiting to happen.
Balancing a budget at the state or local level gets a lot more complicated when employees have deferred benefits. Not paying adequately, Rauh says, is unfair for future generations, because they have to pay for services they’re receiving as well as services rendered in the past.
He’s giving a very basic explanation of how pension plans estimate returns and put money aside, with the historical return having been around 8% per year.
He gives a good example of a person telling a bank that he’s debt free because he put some savings into stocks and bonds. GASB rules for public pensions say that’s just fine.
He makes the point that the current outlook is not as rosy; in the past, you could put money in a safe savings account at 5% interest and make money over inflation.
The problem, Rauh says, is that the benefits are guaranteed, but the investments are not. That should lead to investment in risk-free assets. “The only justification for using estimates higher than that” is if we account for the possibility that they’ll default. (Seems to me he leaves out the possibility of present-budget bailouts in an effective pay-as-you-go system; that’s what tax-hawks fear.)
In the Netherlands, where public pensions are taken “very seriously,” they think we’re nuts.
“We either have to reform defined benefit accounting, or we have to go to defined contributions.”
Eileen Norcross is reviewing where some state and local plans currently stand. She believes that General Treasurer Gina Raimondo did a “wonderful job” by emphasizing “truth in numbers.”
She says GASB rules put RI’s unfunded liability at $4.7 billion; FASB (the private-sector version) puts it at $6.8 billion; and MVL (market-value finance rules) put it at $11.4 billion.
Of 36 locally administered plans, 24 are already at risk on a GASB basis, liability $2.1 billion (40% funded). On MVL basis, MERS plus local plans are at a $6 billion unfunded liability.
Since local pensions are negotiated, not by statute/ordinance, there’s no requirement to fund them. Moody’s singled out Coventry as poor.
Property caps and loss of state/federal aid can restrain payments. Then, pensions costs can rise very quickly (especially when adding in other post-employment benefits, such as health care).
(Just a thought: running through these numbers makes it all sound like such a simple problem to resolve. Then come the politics…)
Norcross says, in contrast to RI, Pennsylvania is still in the “talking phase.” (I’d suggest that Rhode Island has finished talking and acted in such a way as to allow the people to go back into denial.)
At the top of Norcross’s “Consequences” slide:
“Scranton is broke.”
PA law requires municipalities to offer a defined benefit plan, not a defined contribution plan. One of the solutions that they’re playing with is to merge local plans into a state plan, but (she says) the state plan really doesn’t have a plan of its own.
“If you’re going to guarantee a benefit for employees, you should plan it and fund it like you mean it.”
The principle of fairness arises heavily in her “principles for reform,” for older employees, younger employees, and future taxpayers.
For the section of the audience that’s studying public policy, Norcross says pension reform has a fascinating blend of issues.
From the audience, Brian Bishop kicks off the Q&A by asking about the extent to which states are grappling with pensions as legal guarantees.
Norcross brings up the RI law that promises not to default on debts. (That’s specific to bonds, as I recall.)
A Projo reporter asks how unusual it is, as in Central Falls, for example, to slash pension benefits. Specifically, he suggests that CA restricts such cuts.
Rauh says he thinks that a CA judge allowed for cuts, but the bargaining negated the move. “There are many states in which Chapter 9 bankruptcy is not allowed.”
He offers Prichard, Alabama, as another city that’s cut pensions.
Another audience member notes that Coventry is showing what can happen when these problems aren’t addressed, by not paying its firefighters.
He further asks about the new GASB rule for accounting.
Rauh: GASB has responded to criticism by implementing a requirement to assume lower rates of returns for portions of liabilities that are unfunded and not projected to be paid. I’ll be writing about this extensively soon, but Rauh appears to agree with me that the new rules aren’t all they’ve been made out to be.
Norcross adds that the new rules might encourage riskier investments. She also mentions that some private financial entities (like Moody’s) are independently changing their own calculations, which some will consider to be requirements.
Warwick resident Bob Cushman says he doesn’t think municipalities are addressing the problem. Mayor Scott Avedisian is in the audience, for the next panel, but his hand is over his face, so I can’t see his expression. (I get the impression that the mayor is actually Cushman’s intended audience.)
Cushman: Shouldn’t we begin looking at reducing benefits?
Norcross says cities and states need to start considering pensions in terms of their current budgets.
Rauh says the current cost of living suspensions at the state level bring the state not that far from full funding. (Not sure I agree with that.)
Orr is introducing the panel that’s here to talk more about local issues: Scott Avedisian, Mayor of Warwick, Donald Grebien, Mayor of Pawtucket, Gayle Corrigan, Chief of Staff, City of Central Falls, Dennis Hoyle, Auditor General of Rhode Island, Susanne Greschner, Chief, Municipal Finance Department, State of Rhode Island.
Greschner is kicking the panel off. She’s having microphone issues, but she’s describing the local plans… about 110 in MERS. The 35 locally administered have over $2 billion in unfunded liabilities.
Greschner: If we don’t address unfunded liabilities, it could affect current retirees. Current employees could face reduced benefits. As West Warwick shows, current budgets are affected. Ratings agencies are taking closer looks and downgrading municipalities, increasing borrowing costs.
Greschner described the board that’s looking into local pensions per the pension reform law as “diverse,” meaning several varieties of government agents, plus RIPEC.
She says “there will be penalties” for municipalities that fail to submit plans to address their liabilities.
Hoyle restates that 24 of the local plans are “at risk.”
“I think the questionable sustainability of many of these plans is illustrated by the fact that their unfunded liabilities are reaching 50% and 60% of their tax levies.”
He recommends moving local plans into the state-run MERS.
He’s concerned that new GASB rules will make everything confusing by creating two numbers floating around: the calculation for finding required contributions and (if they’re not met) the reporting-only number using the new rule.
By the way, apart from the ones participating, I don’t see a single other elected official in the audience.
Avedisian is describing Warwick’s plans, making them sound in good shape. Interesting to note that he’s speaking as if to Orr, not to the audience.
As Avedisian goes over Warwick’s features, I’m reminded how mind-bogglingly complex the cities’ multiple plans are (COLAs, connections with current employee negotiations, multiple plans). There’s really no way the average resident/voter can possibly know how accurate it is for the mayor to present these plans as in good shape and improving.
Grebien says Pawtucket has a $12 million structural deficit, even before getting into pensions.
He’s saying that reducing estimated returns on investment can have a huge effect on required payments, and Pawtucket is already overtaxed. “We need to change the benefit structure; we need to change the COLAs.”
“Over the past 20 years, there’s been about 10 years” that saw almost no payments into the plans.
Corrigan: “As of today, you can no longer say that Central Falls is in bankruptcy.” I kinda expected the audience to applaud, but I guess it’s not that kind of crowd.
“Pensions were a big reason that Central Falls filed for bankruptcy.” (And the General Assembly agreed, last session, to go a long way toward bailing them out.)
Corrigan: “People are rational actors, so they chose to go out on disability retirement.” At one point, it was 92%. (She didn’t explain what it was that allowed people to retire regularly on “disability” as a choice.)
My parenthetical was premature: Mayors were corrupt and/or just wanted to cycle new employees in, and the retirement board consisted of inside interests.
(Observational note: Grebien and Avedisian are chatting with each other to Corrigan’s left. I don’t think I’ve ever seen panelists gabbing, before, while somebody else was talking.)
Corrigan’s describing new restrictions placed on disability pensions. She says the active members of the plan had watched the city move toward bankruptcy and are willing to allow a “cultural change.”
Audience member asks how Avedisian can even consider letting people retire at 50 years old. Avedisian says that was an increase from zero, but that answer doesn’t seem to satisfy. The upshot is that it was a political decision.
Mike Stenhouse points out the “stark” difference between the first panel (here’s the reality) versus the second panel (which is dealing in a “mythical” reality of higher discount rates).
Grebien says their board is looking at a 4.5% discount rate. “The problem with that is the balance. You’re right, it’s not real.” “How do you gradually” move into a more realistic system.
Again, it’s a political situation, also involving contract negotiations. (Which seems to me an acknowledgment that they’re willing to force either higher tax increases, bigger benefit cuts, or both by not addressing the problem right now.)
Hoyle’s referring to the debate over the “right time frame” to determine liabilities and such.
Orr: Where does the political obstacle exist?
Avedisian: On every level. You’re looking at 2-year election cycles for most communities, so it’s difficult to introduce long-term planning.
By the way, Rauh called out from the audience, when Hoyle was speaking, to ask what the actuaries believe is the probability of achieving the necessary rate of return: the answer was a tentative 60%.
Corrigan: “Without the specter of a bankruptcy, I’m not sure that” the pressure would have existed to change retirements.
Orr is saying how upset his family was when his father’s private-sector pension fell through. “I wonder if we consider our promises at all.”
Just a note: from this local panel, I’m hearing a lot of talk about how hard this all is… to resolve, I mean. It’s a very typical response from elected officials, I’d say.
Avedisian: “For two years, we paved roads with the money that employees put in for their pensions and didn’t pay our own share.” He refused to say when that was and under what administration.
Brian Bishop: The personal story that was told was a good contribution. But those promises were under a contract. Public pensions are typically short statutes that are passed and repassed, in essence, which makes them not really contracts. “The sitting councils do not have the appropriating authority” to impose costs on future councils. He says it’s more like a moral obligation.
“I dissent from the idea that we refer to pensions as ‘promises'” in a legal sense.
Professor Winters is saying that Central Falls showed a change of culture and didn’t represent going back on promises.
Seems to me that, considering all of these various comments, public officials are morally obligated to switch to the most accurate pension accounting, no matter how scary, and use the resulting pressure to change the culture to a sustainable system.
Rauh: “Suppose there’s a 50:50 chance that you’ll achieve those returns, is that responsible public policy to rely on that sort of a chance?
Hoyle: You can’t blame any government for taking advantage of the GASB rules. (What? Of course you can. That’s why we elect people to run our governments.)
Clark gets the last comment to say that going to a lower discount rate isn’t a new imposition, but a recognition of the liabilities that already exist.
Of the following two issues related to Rhode Island’s public schools, which one is a greater concern?