Climate Change as an Excuse to Turn Government Against the People

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.

Belling the Taxpayer Cat

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.

Separate Topics (Somewhat): RI Bitterness and Pensions

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.

Pensions and the Telltale Signs of a Scam

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?”

Marching Right Back to Crisis with the Pension Fund

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.

OPEB: Another Hole and a Proof of Problem

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.

The Pension Disaster Will Be Addressed

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.

The Minimum Debt Load of Rhode Island: $16 Billion

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.

Better to Learn the Pension Lesson Sooner than Later

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.

Common Ground with the Pensioners

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.

Correcting the Treasurer

While dropping off a child’s forgotten lunch box, this morning, I heard John DePetro replaying a segment of this weekend’s Newsmakers program interviewing Rhode Island General Treasurer Seth Magaziner.  Responding to observations that the state pension fund’s investments are treading water or even losing money, Magaziner repeatedly insisted that the proper time frame over which to consider investments of this sort is the “long term,” and in that regard, the fund is on the right track.

This is not true, and journalists shouldn’t let him get away with the lie anymore.  As I’ve written before, if you define “long term” as any time longer than five years and shorter than 30 (which is far back as I’ve seen data), the fund is not on the right track.  The reality is that Magaziner, like Gina Raimondo before him, has a small window during which a “long term” view of about five years makes it look like the pension fund is viable.

Starting the measurement at the bottom of the housing bubble crash and carrying it through a few years during which the federal government and Federal Reserve were inflating stock values makes it look like the pension fund could actually earn 7.5% returns every year, on average.  The idea that such returns could be maintained for decades is so inconceivable that politicians like Magaziner must be relying entirely on the reluctance of people to investigate their claims.

Tom Ward Calls Out Potentially Costly P.C. Bullying by State Treasurer

Echoing (presumably inadvertently) Justin Katz’ similar reservations about the General Treasurer’s “foolish politically correct showboating” with the state pension fund, Valley Breeze Publisher Tom Ward offers an excellent critique of the GT’s recently announced, very foolish new criteria for the choosing of investments for the state pension fund.

By choosing investments based on feelings and a political agenda, isn’t it possible that the fund won’t do as well as those which focus specifically on making as much money as possible for retirees? Or are we saddled with investment managers whose PC agenda is more important to them because taxpayers have to make up for their poor performance anyway?

Great point. It’s so easy to make yourself look good and claim the (highly dubious) mantle of political correctness when someone else will be forced to make up the difference financially. But it may not just be taxpayers who would have to do so. Presumably, Mr. Magaziner will make himself widely available to state retirees facing a potential haircut to explain to them how being p.c. was more important than the intactness of their pension check.

Solutions Offered for Providence’s Financial Problems are Too Revenue Heavy

Well, one thing’s for certain: it’s getting pretty serious in Providence financially judging by the study commissioned by Mayor Elorza and the solutions it contains.

Providence should consider implementing new taxes, selling assets and closing fire stations as part of its effort to reduce a projected structural deficit that could balloon to $37 million over the next decade, according to a study released Monday by the Elorza administration.

The problem, unless WPRI’s Dan McGowan left significant chunks of the study out of his report (quite unlikely), is that the study offers way more suggestions for raising revenue – sell assets, raise PILOT payments, create new taxes and fees – than for reducing spending. The proposal to “transfer city janitorial services to a prisoner reentry program” is welcome – but only seven FTE’s would be affected. Where is the proposal to look at compensation levels across the entire city payroll? Yes, the study suggests broadening the suspension of the pension COLA – but doesn’t mention the pensions themselves. This would clearly be inadequate as the city’s pension fund is at best 30% funded.

Tax rates in Providence, residential and commercial, are already among the highest in the country. When are Providence officials going to start taking steps to live within a budget that TAXPAYERS can afford rather than continuing to take the easy steps of only nibbling around the edges of expenses and continuing the inexorable increase of taxes and fees?

Magaziner Exemplifies State’s Skewed Priorities

One can just about sympathize with Democrat General Treasurer Seth Magaziner.  When taxpayers across the state are complaining on talk radio that the tax return checks with his name on them seem greatly delayed and when the pension fund under his control is actually losing money, the politician must feel an intense pressure to come up with newspaper headlines that somebody might see as positive:

On Wednesday, Rhode Island Gen. Treas. Seth Magaziner announced a new policy that seeks to use the proxy-voting power that comes with Rhode Island’s billions of investment dollars to encourage companies to place more women and racial minorities on their boards of directors.

Unfortunately, many people fall for foolish politically correct showboating.  Heretofore, the state’s index-fund manager, State Street Corp., has done the voting to which Rhode Island’s investments entitle the state.  Presumably, State Street’s votes have been cast with an eye toward maximizing returns on its clients’ investments.

But maximizing returns is clearly not the priority of Rhode Island’s chief fiduciary, Seth Magaziner.  Worse still, not only does Magaziner acknowledge that Rhode Island’s votes may make little difference, but the method by which it will cast them is hot-pan-on-a-silk-tablecloth dumb:

“Any time a man is nominated to be a director at a company where fewer than 30 percent of existing directors are women (or racial minorities), we will vote no. If we end up voting no at a high rate, we will be making an important statement on the financial materiality of board diversity,” Magaziner said.

No individual consideration.  All that matters is body parts and skin color.  Of course, I’m making an assumption, there; Providence Journal reporter Kathy Gregg didn’t ask Magaziner if the vote will be cast according to biological fact or by the personal assertions of the nominee.

The Perks of Misbehaving Under Public Employ, Cranston Edition

Annie Shalvey has one of those follow-up stories, on, that really leaves a taxpayer shaking his or her head.  Where else but on the government payroll is it possible to be a key figure in a significant abuse-of-power scandal and wind up with this reward:

  • More than two years of paid leave (i.e., vacation), including raises, making more than $100,000 per year
  • Ability to cash in unused paid time off in order to reach a higher tier of pension benefits
  • Retirement income and other post-employment benefits

The recipient of those perks of public employment was Police Captain Stephen Antonucci, and readers should not mistake my critical review of the State Police report about the controversy surrounding him with sympathy for its targets.  At this point, though, what Rhode Islanders should really keep in mind is the incentive structure that their elected officials have created.  Note:

Eyewitness News spoke with Councilman Paul Archetto – whose ward was one of two blanketed with tickets.

“I think had Captain Antonucci just manned up to what he did and came clean, he would have gotten a letter of reprimand and maybe a demotion to lieutenant and he probably would have still been working for the Cranston Police Department,” he said.

One can’t help but wonder whether a man in Antonucci’s position would even want to keep working.  During a couple of years of very high pay, he was able to work political and legal channels, and even then, “defeat” is a long vacation followed by a nice little cushion for whatever he decides to do to finish out his working years.

When handling their employees, in other words, our elected officials have left themselves (and us) with very little leverage to achieve fair outcomes that send the right signals and maintain proper incentives.

Riley Urges SEC to Return to Rhode Island

If the state’s 38 Studios bonds were fraudulent in the SEC’s eyes because important information was omitted from the bond tender, what about Providence’s municipal bonds? This is Michael Riley’s interesting point in today’s GoLocalProv.

Last year, Segal Consultants confirmed the Providence Pension Plan had been overstating the assets in the Pension Plan for years. Segal itself warned 18 months prior of the unusual accounting that “overstated” pension assets and the pension funding ratio. …

I am asking the SEC to clarify the “Assets” in the Providence Pension plan. Since I do believe that Providence has been illegally borrowing from the pension plan, and that the assets labeled “other” are essentially an IOU, I am also asking about the timing and approval of these “loans” and whether the City of Providence owes interest on “loans” going back at least 12 years.

The Hardship of Six-Figure Pensioners

An observation from Dan McGowan’s story, today, on a Providence pension trial:  Rhode Island insiders are so disconnected from the reality of everybody who isn’t an insider that they really do feel put-upon and belittled when the public reacts with incredulity to tidbits like this:

Waters, who rose to battalion chief during his 24-year career in the Providence fire department before becoming chief of the fire department in Wellesley, Massachusetts, said the loss of his 5% compounded COLA has forced he and his wife to put “international travel plans” on hold. He also explained that he’s been unable to help one of his sons as much as he’d like because the strain on his finances.

“Because we’re afraid,” Waters, 68, said. Although he said he and his wife, a retired state employee, remain in good health, his “nightmare” is that she’ll get sick and he’ll have to put her in a nursing home.

During a cross-examination by William Wray, one of the attorneys representing the city, Waters acknowledged that he and his wife live off of four pensions, which combined to pay them nearly $153,000 in 2014. Waters also acknowledged that he purchased a BMW in 2014, after the city changed his retirement benefits. The line of questioning from Wray drew groans from some of the 25 retired public safety workers gathered in the gallery.

The retiree making about three times the state’s median household income in retirement is so scared of not receiving cost-of-living adjustments (COLAs) that he’s canceling international vacations, but not so scared, apparently, that he opted not to buy a BMW recently.

Wow, Looks Like Chair of RI Democrat Party Egregiously Lied About Return Rate of State Pension Plan

From Michael Riley’s informative and disturbing column in GoLocalProv this week:

According to [RI Democratic Party Chair Joseph] McNamara the last 5 years Rhode Island earned 9.3% in its pension plan. I was shocked to hear that and wondered where he got that “talking point” from. Never mind, let’s just go to Seth Magaziner’s RI Treasury website.

The five year rate of return for the state pension plan was actually 5%, a far cry from 9.3%. Why did Mr. McNamara tell such a whopper?

Alternate (Probably More Accurate) Definition of “Fine” To Describe State Pension Fund

Financial wiz and former congressional candidate Mike Riley has a column in today’s GoLocalProv in which he describes a conversation that took place on a recent episode of A Lively Experiment about the health of the state’s pension fund.

A recent panel on A Lively Experiment contained a political science professor, a newspaper editor, a politician, and myself.

The premise was that Rhode Island currently at 56% funded using a 7.5% discount rate in March 2016 would be fully funded by 2040. The politician agreed with the assessment of Treasurer Magaziner that since over 5 out of the last 6 fiscal years the State earned 9.3% that we would be fine and easily be fully funded in 2040. The newspaper editor immediately agreed despite the fact that neither the politician nor the editor has any actuarial skills or basis for their prediction that we will be “fine.”

So first let’s define what “fine” means. In politician parlance, we’ll be “fine” means the comment he made will not be remembered and he can go on pretending he knows something about pension finance for the rest of his political career. In Rhode Island he can sit in the Statehouse next to dozens of others with similar skills. We’ll be “fine,” to the editor means that his newspaper will certainly be dead and buried by 2040 and he may need a government job soon. So why not double down on his lack of knowledge, and on his ridiculous endorsement of a kindergarten teacher for the Treasurer of a critical status State like Rhode Island. Wisely the political Science Professor, passed on having any idea how to answer the question and calculate the odds.

Mr. Riley will outline in an upcoming column where the state pension fund actually stands. Meanwhile, one cannot help but wonder whether our elected officials, including specifically the General Treasurer and the Governor, are also using one of these darker, alternate definitions when they tell the public, usually in a reassuring tone, that the state pension fund is “fine”.

Providence Paying for More Police & Fire Than Are Working

John Hill’s article in yesterday’s Providence Journal puts its emphasis on the shrinking of Providence’s police and fire personnel, as 120 out of 415 police officers and 178 out of 395 firefighters become eligible to retire at the end of their current contracts.  One point that Hill doesn’t address, however, is that with every retirement, the city begins paying another person for not working.

Sure, that pay goes through the retirement system, and the theory is that the contributions to the pension fund each year of an employee’s career should be enough that no additional taxpayer money is required once he or she retires.  But it’s long been obvious that the theory is wrong; some might even call it a deliberate lie on the part of politicians and union representatives.

When employees retire, their annual income goes down (usually), and (usually) the government has saved up and invested something so that the cost for that employee is at least reduced somewhat.  Even if the bill is prepaid, though, paying for an employee and the retirement of the person who used to hold the same job is paying for the job twice.

If I’m correctly reading this report from the city, at the end of its 2014 fiscal year, Providence had 591 retired police officers and firefighters, plus 410 on disability pensions and 207 beneficiaries other than the former employees.  That compared with 863 active employees in the pension system.  In other words, even if we don’t count beneficiaries (like spouses and children), for every six working police officers or firefighters, the city is still paying another seven men and women for those jobs.

Another way to put that would be to say that, of all the individuals currently receiving financial compensation for their work as police officers and firefighters, the city is actively receiving services from just 46% of them.  With large portions of active police and fire personnel nearing retirement, this approach to compensating employees doesn’t seem sustainable at all.

And Then There Were the Federal Pensions…

I recall back during Rhode Island’s pension reform debate, some people cited the federal pension plan as a relatively well-run example.  Well… not so much, as Mark Tapscott puts it:

The 1984 law required federal agencies to fully fund their employees’ pensions, just like the private sector has been required to do for decades. But, as the Daily Caller News Foundation Investigative Group’s Katie Watson reports today, agencies have ignored the law with the tacit consent of the U.S. Office of Personnel Management, which oversees both CSRS and FERS.

“For years, the Office of Personnel Management (OPM) has been taking tax dollars from the U.S. Treasury to fund a growing gap in retirement payments … The OPM funded $23 billion, or 28 percent of all payments in fiscal year 2015, in that manner,” according to Watson. The federal pension system, by the way, is the fourth largest such benefit program in the entire world!

This is from the Daily Caller article:

Promised benefits from the Civil Service Retirement and Disability Fund, which has 2.6 million retirees and 2.7 million current federal employees, are only 48 percent funded. If it was a private sector system, retirement leaders would be legally required to have a rehabilitation strategy when it dropped below “critical” funding levels of 65 percent, McKinney said. But in an illustration of bureaucratic “hypocrisy,” no such requirement is applied to the federal government, he said.

The process of the public-sector pension scheme at the federal, state, and local level is to pretend that the benefits are funded while the employee is still working, but the illusion requires unrealistic investment returns and other accounting tricks.  Then the government does various amortization maneuvers to give the impression of getting the system back toward solvency. Ultimately, they’ll have to come up with ways to gradually shift the burden onto taxpayers, years after the benefits were promised.

Here’s a question people should start asking: Have we reached the point that government’s killing the United States of America is a when rather than an if?

An Optimistic Economic Story for Rhode Island

A brief forward-looking story describing a positive vision for all Rhode Islanders.

The Wrong-Way Pension Fund

It’s nearly February 2016; do you know where your state’s pension fund is?

Rhode Island’s pension system investments lost money in 2015, the first year-over-year decline for the retirement fund since the 2008 financial crisis, the State Investment Commission reported Wednesday.

The $7.5-billion pension fund posted a 0.28 percent loss, shrinking by $436 million from December, 2014, as global equity markets slumped after several strong years. In 2014 the pension fund’s value rose 4.9 percent and in 2013 it rose 14.1 percent. During the throes of the financial crisis, the fund lost 26.2 percent in 2008.

The silver lining of Patrick Anderson’s Providence Journal article, though, is that the idea of lowering the pension fund’s discount rate — in other words, of admitting that it’s just not going to average a 7.5% annual investment return in the long term — is becoming a mainstream question. In challenging Democrat General Treasurer Seth Magaziner, Anderson makes a telling point (emphasis added):

Even after a rough 2015, Magaziner said there are no imminent plans to reevaluate the pension system’s 7.5 percent assumed annual rate of return. Reducing the expected investment returns would require larger contributions from the state and municipalities.

“The assumed rate of return should not be adjusted frequently in response to short-term market movements,” Magaziner said after the meeting. “We’ll look at it and make a change if we need to, but I want to get people out of the short-term mindset where they say: ‘the market is up, why don’t we go higher, or, the market is low, why don’t we go lower.'”

This is a classic example of government’s dealing with politically difficult problems by simply hiding them. As Anderson goes on to point out, there pretty much is no long term measure by which the state is actually achieving the returns that it needs to achieve. The real difficulty is that doing the right thing when it comes to management would require an admission that the state’s pension system is much more expensive than the state can afford. So, the solution is to play let’s pretend as the problem gets worse and worse.

On a related note, by the way, I’ve submitted a complaint to the attorney general’s office against the treasurer and retirement system, who refuse to give me the estimate for all pension benefits promised without the discount. The wheels are definitely in motion, so I’ll keep readers posted.

So Easy to Give Away Future COLAs in Cranston

When readers might become confused that a labor union president is actually the mayor’s spokesman in an article in the state’s major daily newspaper, that mayor should probably question whether he’s somehow gotten on the wrong track. The union president is firefighter Paul Valletta — he who claimed that then-treasurer Gina Raimondo “cooked the books” — and the mayor is Republican Allan Fung.

The new firefighter contract apparently has some raises (paid for, it seems, by reducing the number of firefighters), with which local taxpayers might not be happy, but the part of the deal that ought to make the contract a statewide scandal is the explicit declaration that 3% cost of living adjustments (COLAs) on pensions are explicitly a contractual right. As Gregory Smith reports in the Providence Journal:

In a grand bargain several years ago between the city and participants in a closed pension fund for firefighters and police, the public safety employees agreed to forgo some of their COLAs in order to save the fund from bankruptcy.

The arrangement expires in 2024, at which time the 3 percent compounded COLA inserted into the tentative agreement this year would become a figure the firefighters could rely on. As the tentative agreement says, that figure would be a “contractual obligation.”

The only book cooking Raimondo did on the pensions was to pretend that the state pension fund’s discount rate was reduced enough when it went down to 7.5%. (That is the expected investment return, which allows the fund to pretend it will have to contribute a lot less money than it probably will to pensions.) More realistically, the state should have cut it in half, to 4%, but that would have caused spontaneous combustion of elected officials in the State House. (Since the turn of the century, the state’s return has been 4.65%.) According to the state Dept. of Municipal Finance, Cranston’s pensions are only 21% funded, and its discount rate is 7.5%.

In short, the city has no business guaranteeing COLAs in the future. Doing so, the mayor is putting taxpayers and their property at significant financial risk, and taxpayers statewide should be concerned that Cranston’s bill will one day fall on them and that Mayor Fung has set a terrible precedent for their own local pensions.

Another Government Office… Yeah, That’s the Ticket

Treasurer Seth Magaziner’s debt-oversight proposal and the Providence Journal’s endorsement of it avoid the fact that we can’t trust state government.

The Retirement Board’s Incentive to Protect Inside Interests

Today’s Providence Journal Political Scene includes a section on the race for seats on the state Retirement Board.  I’ve long been saying that the state needs to run its pension system with the kind of honesty that might leave the government and the system itself open to criticism.  Among the first steps for that to happen would be the Retirement Board’s lowering the discount rate that the actuaries use to make the liability seem smaller, not by a measly half percentage point, as it did to kick of then-treasurer Gina Raimondo’s reform push, but by 3.5 percentage points or more.

By law, the Retirement Board consists of:

  • 3 elected or appointed government officials or their subordinates (any or all of whom could be or be married to active or retired members of the system)
  • 1 representative from the League of Cities and Towns
  • 5 active employees eligible for the system
  • 2 retirees in the system
  • 4 public members (any or all of whom could be or be married to active or retired members of the system)

By design, in other words, one-person shy of a majority has a direct, personal investment in the fund.  In theory, of course, the other eight members have the health of the state and the burden on taxpayers in mind, but that’s become nearly a laughable proposition in Rhode Island — at least that anywhere near all eight would see that as their primary objective.

The incentives for public officials and even people who volunteer to serve on the board as private citizens are entirely unbalanced from the incentives for those in the system, and hard-fisted union tactics can easily swamp a will to do right by taxpayers.  As for the other side of the ledger, a look at the three candidates running to represent the pension-system members gives some sense of their incentives, looking at fiscal year 2014 data from RIOpenGov:

  • Roger Boudreau: retired at 51 (now the president of the Rhode Island Federation of Teachers retiree chapter), having contributed $80,689 to his pension over 30 years. Latest reported annual pension payment: $42,334
  • Michael Boyce: retired at 48, having contributed $24,855 to his pension over 31 years. Latest reported annual pension payment: $28,818
  • Joanne Matisewski: retired at 54 (now working in financial services), having contributed $114,706 to her pension over 30 years. Latest reported annual pension payment: $51,148

The returns on these employees’ investments are obviously well above 7.5% per year, and they have every reason to keep their investments growing.  It doesn’t take all that much cynicism to think that they might decide it’s better to keep the people of Rhode Island from having a true sense of the commitments that their elected officials have made on their behalf.

Looking for Pension Transparency in the New Year

I know at least one trail I’ll be chasing in the new year.  As I’ve explained, when people in state government talk about pension liabilities, they talk about a current liability: The estimated amount that the state has promised in benefits to employees and retirees subtracting all scheduled contributions from employees and taxpayers and then discounted back in time to the current year with an assumption of 7.5% return on investment each year.

Say a newly hired state employee will work for 25 years and then retire for 20 more.  When the state tells us how much he’ll collect 45 years from now, it doesn’t actually tell us how much he’ll collect 45 years from now.  I’ll make up these numbers for illustration purposes: Let’s look at a $100 that the retiree will receive in that last year.  First, let’s say the employee and state will have contributed $10 toward that $100 over the course of his career; that means the liability is considered to be $90.  Next, the state discounts that amount by 7.5% per year.  By that math, the state reports the $100 pension payment as a $3.73 liability.  If the system is 50% funded, it says its unfunded liability for that $100 is $1.87.

Based on information in the latest valuation, I gave a rough estimate of what the total estimated benefits for which the state is actually liable of $57 billion over the amortization period.  At best, this could be said to be the total liability if the state were planning to payoff the benefits and end the system in around 20 years.  In other words, it’s nowhere near the total dollar amount that taxpayers are ultimately promising.

So, I asked the treasurer’s office for the actual total for state employees and teachers.  At 3:10 p.m. on New Year’s Eve, a state lawyer replied to my request, saying, “The Employees’ Retirement System of Rhode Island (ERSRI) does not maintain the information you seek.”

The state’s private actuary, Gabriel Roeder Smith & Company (GRS) either has this number on hand or could easily produce it.  It’s just that General Treasurer Seth Magaziner doesn’t want to ask for it in order to give it to me.

So, on Monday, I’ll begin calling and emailing GRS for the number, although I’m reasonably certain that they’ll say they aren’t authorized to give it to me.  Next, I’ll start bugging Attorney General Peter Kilmartin, although the likelihood is that his lawyers will tell me that the state Access to Public Records Act (APRA) doesn’t cover information that private contractors never turn over to the state, and in any event, that a single step in the calculation falls under one of the exemptions of the law.

At each step of the way, I’ll make sure to publicly document every communication, and I’ll appeal to the next level in the process.

The Wrong Way to Economic Development

Ed Fitzpatrick’s review of opinions about Democrat Governor Gina Raimondo’s first year in office is pretty much what one would expect.  Insiders tend to like her (with an asterisk for pension reform), her political opposition does not, and centrists who focus on areas in which she’s left reason for worry are worried.  It says a great deal that, when listing her accomplishments for the year, the governor promotes a settlement that actually reduced the effectiveness of the 2011 pension reform that brought her national fame.

When a legal settlement that failed to answer the critical question of pensions’ legal standing while costing taxpayers $1.3 billion over the next couple of decades is one of your big successes, folks would be justified in thinking there must not be much else to tout.

The economic development promotions are the most objectionable, though, inasmuch as they follow a path based on insider connections and faith in those insiders to pick winners and tell people what to do, economically:

Raimondo said she has tried to change the overall business climate by, for example, eliminating the sales tax on commercial energy use. “But separately you need an active, pro-active economic development team, which Rhode Island has lacked for a long time,” she said. “And the tax incentives that the legislature passed are just basic tools in our tool box that pretty much every other state has.” Boston used tax incentives to bring life-science firms to the South Street Seaport, and now that area enjoys critical mass, she said. In Rhode Island, “those first few deals   — real estate deals or company deals — they will be expensive, they will take tax incentives,” she said. “But that is the position we are in.”

Representative Patricia Morgan (R, Coventry, Warwick, West Warwick) is right when she tells Fitzpatrick that “we shouldn’t have to pay people to come to Rhode Island.”  Not only is that the right answer on principle, but (I’d argue) it accords with the real problems that the evidence suggests Rhode Island has.

For another reason, this morning, I reviewed some of my previous writing on Rhode Island’s economic woes, including a four-post series from early this year (one, two, three, and four).  The biggest span of broken rungs on the Ocean State’s economic ladder isn’t job creation through new businesses, but in job maintenance as businesses become established.  The data takes interpretation, to be sure, but the problem appears to come when businesses start to really establish themselves and discover they can’t overcome our regulatory and tax obstacles.

Picking favorites among who’s here or bringing in big players from out of state who are interdependent with state government — with the businesses reliant on government subsidies and the government politically dependent on the businesses’ continuation — merely solidifies the role of elites making centralized decisions that are more and more difficult for innovators and hard workers to get around.

District 11 and Government Of, By, and For the Employees

A couple of weeks ago, I mentioned that the Democrat candidate for the District 11 seat in Rhode Island’s state senate, Jim Seveney, would be following the path of his father, Gardner, who (from what I can easily tell) held the position in the 1980s.  In fact, the legislature dedicated a state garage in Portsmouth to Gardner Seveney in 1986, and if I’m not mistaken, the town’s outdoor sports complex on Glen Farm is named after him, as well.

This gives some sense of the dynastic element of Seveney’s campaign, but a campaign letter he sent out last week begins to fill in the blanks of why he might find it worth continuing the legacy.  His wife of 39 years is a public school teacher in Portsmouth, where Seveney has served on both the school committee and the town council.  With his wife no doubt nearing retirement and with teacher pensions likely to prove a continuing challenge for the state, Seveney has good reason to transfer his influence from the town level to the state level, beyond the $14,000 paycheck.

A quick online search illustrates how this motivation overlaps with the idea of dynasties.  Seveney’s mother worked in the school system, too, and his recently deceased uncle retired as a state employee in the late-’80s.

The candidate’s letter also states that, when he returned to Portsmouth in the late ’90s, he “decided to run for public office to try to give something back to the community that had given me and my family so much.”  No doubt, Seveney’s sentiment is sincere, but that doesn’t mean Rhode Islanders should continue accepting such expressions of gratitude from people with a special interest in the offices for which they’re running.

When it comes down to decisions critical to the health of the state, how much will Seveney’s personal investment affect his votes as a senator?  According to RIOpenGov, in 2014, the average retired teacher received a pension payment of just under $44,000, part of more than $430,000 that the average retired teacher had already received in payments after contributing an average of $78,000 over his or her career.  The average estimated lifetime pension benefit for currently retired teachers is estimated at over $1.1 million.

Even with the most altruistic of intentions, that’s a lot of incentive to see “public service” as rewarding in a more direct way than good feelings and public honors.

Playing Pension Fund Poker with the Public

Rhode Island’s pension fund (mainly covering state employees and teachers) hasn’t been doing very well at the investment market’s poker table. According to a Dec. 16 article by Katherine Gregg (“R.I. pension fund sharply lags expectations again”), the $7.63 billion fund has seen only a 0.88 percent return on its investments during the calendar year now coming to a close. The pension system’s financial plan requires a 7.5 percent return every year.

The reaction of General Treasurer Seth Magaziner, a Democrat, in the article is so wholly inadequate that he ought to be made to spend the next few weeks of news cycles backtracking: “The assumed rate of return reflects an expectation for the average performance of the pension system over the long-term; we do not expect the pension fund to meet this target each individual year,” he said.

Pressed on the wisdom of keeping the predicted return so high compared with recent results, Magaziner continued, “Our actuary has recommended that the current investment assumption remain in place for the time being, but we will continue to evaluate the situation.”

Anybody who’s read through a handful of pension reports will suspect that the actuary doesn’t really “recommend” an assumed rate of return so much as tell officials whether the rate that they find politically comfortable is outlandish for financial reasons. The question isn’t, “Is this the correct investment return to predict?” Rather, it is, “Would it be reasonable of us to predict this investment return?” The difference is critical.

Continue reading in the Providence Journal.

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