Central Falls figured prominently in a Wall Street Journal article, yesterday, about government pensions:
When the math no longer works the result is Central Falls, R.I., a city of 19,359. Today, retired police and firefighters are wrestling with the consequences of agreeing to cut their monthly pension checks by as much as 55% when the town was working to escape insolvency. The fiscal situation of the city, which filed for bankruptcy in 2011, has improved, but the retirees aren’t getting their full pensions back.
“It’s not only a financial thing,” said 73-year-old former Central Falls firefighter Paul Grenon, who retired from the department after a falling wall punctured his lung, broke his back and five ribs, and left him unable to climb ladders. “It really gets you sick mentally and physically to go through something like this. It’s a betrayal, as far as I’m concerned.”
Just about everybody who engages with the public debate has been happy to pretend that Rhode Island’s pension problem has been solved, but it’s merely been put off and, to some extent, hidden. When it comes to pensions, that is the name of the game: hide structural problems and delay days of reckoning so that nobody has to acknowledge the problem… and as much of the problem as possible can be passed on quietly to taxpayers.
General Treasurer Seth Magaziner, for example, led the pension board to an adjustment that managed to keep public awareness at a minimum. At the same time that the pension board dropped the investment-return assumption to 7.0% — a change as steep as the one that led to Gina Raimondo’s crisis and reform — Magaziner’s pension board put automatic increases in taxpayer costs at the beginning of the next decade. The pension board also changed how the state will adjust for investment shortfalls, which will also keep the growing cost quiet.
The way it used to work, the state would pick a date in the future for amortization, which is to say a year by which the plan would be fully funded, and pay an extra amount of money annually to hit that target. As investment returns came in low, that goal proved less and less plausible. That would spark incentive for some reform and (typically) reamortization to restart the clock. I haven’t had a chance to really analyze the recent change, but it appears that, now, any year’s shortfall will be automatically amortized on its own.
So, let’s say investment returns come in $100 million short, one year, which would be roughly 1% of the total fund right now. After 20 years, the gap would be $387 million, because the original $100 million wasn’t there to invest. In the past, this was simply considered the way investments fluctuated, with the expectation that good years in the future would balance out the bad years in the past. That’s the whole point of picking a “discount rate,” or an investment return estimate. Now, the state will treat that $387 million future shortfall as unique new debt and add around $9.4 million to its annual payments for the subsequent 20 years.
In total, the pension board added millions of dollars in pension payments beginning in 2020 to account for changes it made in 2016, and the payment will automatically go up each year based on any investment shortfalls two years prior. Consequently, state and local contributions to the pensions of teachers and state workers will increase from $415 million in fiscal year 2018 to $643 million in fiscal year 2018 — that’s 5% per year.*
As a matter of money management, this is arguably a better way to go (even though convoluted and inadequate), but government funding also requires the consideration of politics, and on that count, this strategy benefits union members and politicians by postponing a final reckoning. It keeps an impossible, unaffordable scheme going for a few more decades. The annual increases in our payments will keep adding up, and the state’s budget will keep getting tighter, but without affording a clear case for public consideration.
We should all be able to sympathize with Mr. Grenon’s feeling of betrayal with his pension, but we still ain’t seen nothing yet. Labor unions and politicians have colluded to give unrealistic benefits to employees and to hide the real cost. The bill will come due.
* Over the same 10 years, by the way, employee contributions to their own pensions will only go up about 0.6% per year. That’s actually much less than payroll is supposed to go up, which means that employees will actually be paying less and less of their pay toward their own pensions. That lack of an increase will leave you, Rhode Island taxpayer, with more and more of the burden for something that gives you no benefit and was an unrealistic promise of politicians you probably had no role in electing.