Pension fund data is complicated, so it’s risky to proclaim silver linings without knowing what caused the appearance of them.
Not to go all pensions, today, but the response of Democrat General Treasurer Seth Magaziner, quoted in Katherine Gregg’s recent Providence Journal article, is so wholly inadequate that he ought to be made to spend the next week of news cycles backtracking:
Asked by The Providence Journal on Wednesday if the time had come to reduce, once again, the state’s investment-return projection, state General Treasurer Seth Magaziner said: “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.”
When questioned about the significant gap between projections and performance, he said: “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 actuaries’ pension reports will suspect that the assumed rate of return is not recommended by them, but rather requested by politicians with their consultation. The question isn’t, “Is this the correct investment return to project?” Rather, it’s, “Would it be reasonable of us to project this investment return?” The difference is critical.
Putting that aside, Magaziner ought to be hiding his face from the public for playing the “long-term investment card” because it’s so easy to call. But let’s play his game. Gregg reports that the calendar year return for the fund has been 0.88%, which should really be understood as a loss, meaning -6.62%. Well, what about last year? 2.2% (read, -5.3%). The last 10-year average? 6.0% (read, -1.5%).
The latest valuation report gives the annual returns for the last 21 years, back to 1995, and the average is 7.27% (-0.23%). That looks close, at least, but the green line on the chart at the bottom of this post (total value of the stock market) shows that 1995 happens to be the year investments took off into the stratosphere.
Start the clock at the turn of the century, and our 15-year average annual rate is 4.65% (-2.85%). In fact, if you define “long term” starting any year from 1995 through 2008, you’ll find that the compound annual growth rate is less than we need it to be. That encompasses the Bill Clinton stock market changes that shot the markets off like a rocket, including the dot-com bubble, the housing bubble that popped in 2007 (also attributable to Clinton, by the way), and the quantitative easing bubble that we’re now experiencing.
Rhode Island’s general treasurer shouldn’t be trying to lull us to sleep with promises that we can’t just look at one year… or two… or ten… or 15… or 20. He should be explaining what the state is going to do to make sure that it isn’t relying on a financial miracle.
That gets to Gregg’s question about reducing the investment return predictions, because the first step to solving a problem is acknowledging it honestly, but when it comes to government pensions, the alternative to hoping for miracles is addressing a calamity.
After putting up my post about Rhode Island’s pension fund performance, yesterday, I managed to get my hands on the valuation report for 2015, which isn’t on the general treasurer’s Web site, yet. My confusion about the fund’s performance derived from the fact that, although the pension settlement wasn’t signed into law until the last day of the fiscal year (June 30, 2015), the actuaries applied its changes to a revised valuation of the 2014 fiscal year.
That change pushed the state employees funded percentage from 57.4% to 56.1%, and for FY15, it rose slightly to 56.6%. For teachers, the FY14 drop was from 59.6% to 58.2%, rising to 58.8% in FY15. The total unfunded amount went from $4.4 billion to $4.6 billion, with the FY14 revision and then to $4.55 billion for FY15.
For most folks, those numbers are probably just a bunch of abstractions. Here’s a number that might seem a bit more real: The actuarial accrued liability — the cost of the promised pension benefits beyond what the state and employees will put into the fund — increased a quarter-of-a-billion dollars with the settlement, or $250.7 million, and another $17 million in FY15.
But we can’t stop there, because that number assumes the state’s 7.5% return on investment in order to reduce (“discount”) the total cost. As of the end of FY14, the state employees’ pension was scheduled to be amortized (i.e., fully funded) over 21 years, and to disguise the increase, the teachers’ pension amortization was increased a little, to 23.3 years. Removing the “discount,” the pension settlement actually added $1.3 billion over the amortization period. That’s $469 million for state employees over 21 years and $798 million for teachers over 23.3 years.
This number is important to know because of the effect of actual returns. According to the valuation report, the average annual return over the past 10 years was 6%. Readers can decide for themselves whether even that number is likely to be hit in the two decades to come, but even if it is, the actual cost (using the accrued liability) of the settlement would have been more like $343 million. That’s nearly a $100 million hit to our pension liability simply by adjusting predicted investment returns to match the experience of the last decade.
These numbers can be staggering, and it only gets worse. As stated above, the actuarial accrued liability is the cost above and beyond the contributions that the state and employees will make. As of the end of FY15, the present value of all promised benefits was $12 billion. For FY14, the settlement increased this present value of all future benefits by $412 million.
That’s the actual estimated benefits for all individual employees, individually discounted back to that year. I’ve never seen the undiscounted total promised benefits published anywhere, but for illustration, if we calculate the FY15 present value to the end of the amortization period (around 20 years), the total pension benefit for teachers and state employees is currently worth $57 billion.
Given the reliance on investment returns and the sheer numbers involved, one can see how this simple employee benefit can become a threat to our entire economy and why, ahem, it’s in officials’ interest to keep the issue quiet for as long as they’re able to do so.
As far as I can tell, nobody’s been tracking Rhode Island’s state pension fund according to the performance expected when the state implemented reform in 2011, and it’s a bit of an eye-glazing exercise to go back and refresh one’s memory. Still, something in Ted Nesi’s article, yesterday, made a quick review seem justified.
Nesi’s headline point is that the “shortfall” for state employee and teacher pensions hasn’t moved much, increasing to $4.55 billion as of June 2015, up from $4.5 billion in 2012, which will be a little worse now that the state has agreed to a legal settlement with retirees and the unions that used to represent them. (I’m getting different numbers than Nesi from the source material and am trying to clarify.) By “shortfall,” Nesi means the unfunded/unamortized actuarial accrued liability (UAAL).
This is the paragraph that deserves a closer look:
The settlement has caused a dip in the state’s pension funding levels, which measure how much of the state’s long-term liability could be covered by its current assets. The pension funding level for state employees fell from 57.4% before the deal to 56.6% as of June 30, while the funding level for teachers fell from 59.6% to 58.8%.
As of the 2014 audit, the combined funded ratio for teachers and state employees was 58.7%, which the settlement probably reduced to 57.9%. Documents that used to float around during the reform push appear to have disappeared from the Internet, but this old post on the Current has charts of the data. The spring after reform, the state was expecting the pension fund to be around 60% funded by 2016 and on a strong upswing, having dipped toward 55% around 2014.
That’s with a 7.5% investment return. A second chart showed the trend if the market went wrong and the state only realized 5% return on investments, in which case, the projection was for hovering around the mid-to-high 50s until whenever the investment return improved to 7.5%.
As of the 2014 audit, the investment returns were running at 12% for the previous five years, which appears to have kept the fund from hitting the projected low point. But we’re supposed to be experiencing the upswing, now, and it should be even stronger than projected, even with the five-year average investment return dipping to 9.8% by the end of fiscal 2015. What’s going on, here?
This should be a matter of major concern, because investment returns are likely to drop in coming years, and pension reform included a provision that dubs the plan “endangered” if it dips below 50% funded after five years of decreases. At that point, the pension board begins to take on constitutionally dubious authority to revise reforms.
(Note: If Andrew Morse quoted the legislation correctly in the post at that last link, somebody revised the language to eliminate the “and” that required both the 50% and five-year rules to apply to “endangered status.” That may mean one or the other would be sufficient as a trigger.)
Sad to say, but it’s always refreshing — encouraging — to see people with a platform take a sober approach to pension funds, as Tom Ward does in the Valley Breeze:
In the “old days,” pre-recession, savers could earn a 3 percent guaranteed return at their local bank or credit union. So could the pension funds. And that 3 percent got managers a long way in reaching their goal for pensioners. With that safety net removed, and with much lower returns from safe government and corporate bonds, the 7.5 percent growth hurdle is much harder to reach. In fact, with most of the best stock market gains behind us for this cycle, I expect it will become clear soon that pension fund estimates will have to be adjusted.
Looking at related questions back in 2012, I noted that the pension fund essentially required a decade that mirrored the 1950s, ’80s, or ’90s. That struck me as a long-shot back then, but we’re now well into a long period of insufficient growth and overdue for a slip.
As currently constituted, Rhode Island’s public-sector pension system — like pension systems across the country — is simply fraud, selling employees and retirees benefits (with the help of labor unions) based on an investment scam and placating taxpayers with imaginary math. This won’t end well, and it will only end worse if the general public doesn’t get smart enough to call officials on the baloney and demand a straightforward and agreeable resolution.
Being a long-time critic of the mainstream news media, it’s worth a few moments for me to unpack the paragraph in my pension-related post, yesterday, which I summarized on Twitter thus: “With pensions, a false expert consensus forms that journalists don’t want to challenge too forcefully.” The Twitter statement might have been a bit more inflammatory than it had to be, inasmuch as the pension issue provides context for a charitable interpretation of the dynamic that conservatives call “bias.”
Approaching issues of public policy, I start out with an innate suspicion of government and unions. So when I come across a pension reform that doesn’t either gut the system and throw what remains into personal investment accounts or hit taxpayers with a massive invoice, my attitude is one of looking for the scam. With that view, it’s possible to be open and objective in the sense that I may reach the point of saying, “If there’s a scam here, I can’t find it.” The point is, though, that I start out tuned and motivated to find it.
Even a journalist who doesn’t have an enculturated sense that government is generally good will come to issues like pensions from a different angle. (And, sorry, I do think it comes through that most journalists have that pro-government sensibility.)
Very often, a journalist whose watchword is “objectivity” faces the task of measuring the word of government officials and their expert consultants (decked out with all the fancy trappings and public-relations spin that taxpayer money can buy) against the repeatedly contrarian assertions of smaller groups whose motivation (for good or ill) is not as clear. In the case of Raimondo’s pension reform, for example, the RI Center for Freedom & Prosperity was a brand new group with private funding that brought in experts connected with a national movement, and with a single local researcher (me) who was still a working carpenter at the time.
Given the modern media business, journalists don’t have the time to become experts on everything on which they have to report, and when it comes to something like pension funds, even digging enough to be able to understand the differences of opinion between the government experts and the full-time carpenters can be a slog through turgid, technical texts.
All that said, the difference in reportage when journalists (as a group) want government to do something is remarkable. When it comes to issues of race or gun control, for example, reporters’ suspicion of contrary claims is palpable. I think think they tend to be wrong in such cases, and I think a belief that government can and should take action on those sorts of issues contributes to a willingness to believe that government can do things like manage massive pension funds. But they should spend more time looking for the scam, because if government doesn’t get things right with budgets and economic policy, none of the other stuff is going to matter in the long term.
Woonsocket’s budget and pension woes continue their slow crash, the folks in charge continue to ratchet their denial, and the people are still unwilling to accept reality.
The grades are out, and once again the status quo fails on the 2015 RI Report Card on Competitiveness. When will the political class learn that their way is simply not working to reach their stated goals? If Rhode Island is to reform its way of conducting business, our elected officials must learn to place less trust in government-centric programs for every problem. We will never improve our state’s employment situation unless we adopted the need reforms that will allow Rhode Islanders to empower themselves to achieve their hopes and dreams. The 2015 report card decisively demonstrates the wreckage that decades of liberal policies have wrought upon our state.
The 2015 RI Report Card shows how Rhode Island’s political class continues to cater to special insiders, while depriving other Rhode Islanders of the opportunity for upward mobility, educational opportunity, and personal prosperity. In the major categories, Rhode Island was graded with two F’s, seven D’s, and one C. The two categories with F grades are Infrastructure and Health Care; the seven D’s are Business Climate, Tax Burden, Spending & Debt, Employment & Income, Energy, Public Sector labor, and Living & Retirement in Rhode Island; while Education received a C-. Among the 52 sub-categories evaluated, Rhode Island received 19 F’s, 24 D’s, 5 Cs, 3 Bs, and just one lone A.
These unacceptable grades should be a wake-up call to lawmakers that a government-centric approach is not producing the social justice and self-sufficiency that Rhode Islanders crave. By burdening the public with policies that discourage work and a productive lifestyle, the status quo is failing the people of our state. On the 2015 RI Report Card on Competitiveness, the Ocean State received “Ds” in the major categories of Jobs and Employment, and in Tax Burden. We must learn to trust in our people and remove the tax and regulatory boot of government off of their backs by advancing policies that empower the average family with choices, that reward work, and that grow the economy.
Only free market policy will transform the Ocean State by advancing policies that empower the average family with choices, that reward work, and that grow the economy. We can no longer tolerate Rhode Island falling further behind. The Center will continue to work tirelessly to promote policies like sales tax reform and school choice in order to help our fellow Rhode Islanders by unleashing their potential. We encourage you to help spread the word about the failing grades the status quo in Rhode Island received this year. You have power to change the Ocean State into a place where everyone can prosper. Thank you.
The Providence Journal reports, today, on the litigation of some Cranston government retirees who are suing the city because they weren’t willing to accept a compromise agreement over the city’s reduction of cost of living adjustments (COLAs) for fifteen years or so. The theme of the article is that those who testified would not have retired so early if they had known there was a possibility that their COLAs would be temporarily reduced during their retirements:
The 9 are among 76 retired members of the police and fire departments who sued, alleging that the city broke its word to them in a series of collectively bargained labor union contracts under which they lived faithfully. They seek a declaratory judgment that there was a breach of contract in violation of the U.S. and state constitutions and an injunction that would force the city to reinstate their COLAs retroactively.
Using the RI Center for Freedom & Prosperity’s RIOpenGov site, which has 2010 pension data for Cranston, here’s some information about the retirees mentioned in the article:
All of these retirees are still younger than the age that is generally understood to be retirement age (even at the out-dated number of 65). With the possible exception of those with disability pensions, there’s a good chance that some or all of them have had other sources of income in the years since they retired. All of them had pension payments in 2010 that exceeded the median earnings for Cranston residents in 2013.
State and local governments should not be guaranteeing lifetime payments above area median earnings for around 40 years of former employees’ lives using an inherently unsustainable pension system. While it’s unfortunate that these men made decisions based on the false impressions about pensions that have been pushed by elected officials as well as labor unions, it’s just not right, and it’s just not fair, to make a struggling community continue to support such disproportionate benefits. That’s all the more true considering the role that labor unions play in electing the very politicians who set the law and then negotiate the contracts.
The now-probable imposition of tolls across Rhode Island may be the linchpin of calamity for the state.
Rhode Islanders have gotten used to national accolades for Democrat Gina Raimondo since the supposedly groundbreaking pension reform that she championed as general treasurer in 2011. Most recently, Fortune magazine’s senior editor Dan Primack has proclaimed Raimondo to be “worth keeping tabs on,” with the provocative lede: “How tiny Rhode Island suddenly became a case study in good government.”
A more-true statement would be that the Ocean State is a case study in the perils of superficial political analysis from people outside of the state.
Primack notes that the state’s government labor unions sued to stop the pension reform, but he presents Raimondo’s ascent to governor as a reward from satisfied voters. In reality, the 2014 gubernatorial race proved (once again) the dysfunction of Rhode Island politics. Raimondo won with just 40.7 percent of the vote, thanks to the last-minute entry into the race of a perennial novelty candidate.
Worrying about minor conflicts of interest in government planning misses the point that progressivism is an ideology built around the idealization of conflicts of interest.
Although I can’t find a report that Goldman Sachs seems to have released at the end of last week, it’s worth highlighting this post from ZeroHedge, which highlights the analysts’ findings on state pensions. Take a look at the chart:
It’s good to see that Rhode Island is not one of the states failing even to make its required contribution, but note that the contribution that Rhode Island ought to be making, according to Goldman, is twice what it is now. That is, rather than taking about three-quarters of a percent of its GSP out of the economy the state of Rhode Island should be setting aside about 1.5%. (That’s somewhere on the order of $825 million.)
The reason (as I’ve written again and again) is that the state assumes it will get 7.5% on its investments every year, forever. In the most recent year, it made 2.22%. Even with the policies of the Federal Reserve and the Obama Administration wildly inflating the stock market, Rhode Island’s ten-year average was 6% when I checked a few months ago and 4.8% looking back to 2000.
The clock is ticking.
The accounting for public-sector pension funds is a scam on both taxpayers and government employees. There’s no way around that conclusion. Consider:
Rhode Island’s state employee pension fund made 2.22 percent in investment returns for the budget year that ended June 30, state General Treasurer Seth Magaziner announced Tuesday.
That was below the pension fund’s internal benchmarks and substantially below the 7.5-percent assumed rate of return set for the pension fund, but Magaziner applauded what he said were good returns in a particularly challenging year for investors.
Comparison with other investors is not good enough. If we were all running from an avalanche (didn’t want to go back to the lava well twice in one day), saying that you’re in the middle of the group of people racing for their lives is an irrelevant measure. Middle, front, or back, the only measure that counts is whether your speed is enough to escape death.
The fund has to make a certain amount of money. If it does not… catastrophe for taxpayers, beneficiaries, or both.
The risk does not lay evenly, either. Note that Paul Edward Parker’s article highlights the fact that the formula for cost of living adjustments (COLAs) for retirees goes by a five-year schedule, by which the state is doing OK. As I’ve written many times (here, for one), pensions are a long-term investment, and over the long term — a 10-year average or longer — Rhode Island is behind on its investments. We can’t afford only to beat benchmarks that are lower than the investment projections that we use to calculate contributions.
Back when the General Assembly passed then-Treasurer Gina Raimondo’s pension reform, I estimated that the game would last about a decade, before it would become apparent, again, that the system wasn’t sustainable. The stock market boom of the last few years (which I’d characterize as artificial) may have extended that period a little bit… or it may have reduced it, depending on the timing and nature of the correction. Either way, it wouldn’t surprise me to see now-Governor Raimondo find some way to move on from her current job, rather than seek a second term, so as not to be in the direct line of fire when questions about the pension fund become more difficult than Magaziner is able to spin.
Dan McGowan, of WPRI, emailed to point out that he wrote about the subject of my earlier post back in May. The article does prove that at least one mainstream journalist has brought the topic up, but the content illustrates much of my point. Consider this from McGowan’s article:
[Kathleen Riley, a senior vice president and actuary for Segal Consulting,] told the committee the change in calculation “in many ways is not too meaningful,” but explained that is why the city’s unfunded pension liability grew from $831.5 million at the end of the 2013 fiscal year to $894.3 million in 2014.
“Historically very little attention was paid to funded ratio so it didn’t really matter how you reflected that contribution receivable,” Riley said. “But we think this is a cleaner approach to presenting your numbers, [and] a more accurate reflection of your assets in your fund and your funded ratio on the valuation date.”
What is this but a rolling scandal for which no politicians are ever held accountable? Nobody used to care whether the pensions were funded, so the accounting didn’t really matter? That’s scandalous. Then, when people started to pay attention, it benefited the city to lag its contribution to the pension fund (which looks like about 25% of its declared assets) by a full calendar quarter.
If somebody were really relying on that money (rather than just expecting taxpayers to come up with any shortfalls when bill comes due), that would make a difference. Somebody looking at an audit at the end of June would expect that $63 million to be in the account gathering investment returns for three months. Using the city’s (absurdly high) projected return on investments of 8.25%, that’s around $1.3 million lost to the pension fund for the year.
If the city does this every year, by the end of a decade, it would be short around $20 million. At the 30-year horizon often used for pension calculations, it would be out over $150 million. (This all ignores the possibility that doing this accounting helps the city avoid thresholds like a designation of “critical.”)
But it’s complicated, and it’s all just numbers on a page until the city has to take more money away from some resident in order to give it to some retiree.
I should note, by the way, that this is more an attack on our general assumptions about government than on journalists. If you look at the note at the end of this April 2012 post of mine, you’ll see that WPRI’s Ted Nesi and I were discussing Providence’s delayed payments back then. Those of us who write about these things can’t be expected to trace every curious detail, or to know off the tops of our heads what normal practice is. Back then, I was concentrating on explaining how the entirety of pension accounting is a scam.
Today, I’m mostly pointing out how pension accounting illustrates the flaws in our civic system, which I’d suggest should advise us to severely limit the activities of government.
Reading Michael Riley’s latest article on the financial condition of pension funds at the state level and in Providence, one gets the sense of two realities. Riley’s an investment professional and knows this game, so when he writes things like this, people should listen:
Unless the Providence pension Plan receives $62 million in cash or investments from the City by June 30, 2015 the city will once again default on a current liability loan. …
The countdown for Providence Bankruptcy and default is on and its 14 days. Raimondo and Magaziner have also been oblivious to the struggles of cities and towns, preferring instead to campaign for green spaces and a green infrastructure bank etc. Meanwhile, the state’s pension performance for fiscal year 2015 is horrible and will certainly push Rhode Island and its funding ratio farther down into critical Status. …
I estimate that with just 2 weeks left in Fiscal Year 2015 the State Pension Fund has earned just over 3% compared to their own projection of 7.5%. That is a shortfall of approximately $360 million dollars.
One would think this sort of assessment from a credible expert would be slipped into the news cycle somewhere, but it’s not. Why is that?
Part of the problem, I think, is that changing models for the news business have broadened the responsibilities of journalists. This is complicated subject matter, and the same reporters who would take it on are also covering a wide variety of complicated subjects. Obviously, there’s a massive state budget in the works, and then there are flashier, edgier topics that the state’s politicians keep tossing into the mix, like truck tolls, for example.
Another part of the problem is that there’s so much fluff and flop in government budgets that it’s relatively easy for officials to cover things up. With a magician spell over the complexity, money can just appear, and policies can just change with some ostensibly disconnected rationale. Lo’ the state slips $62 million somewhere into its aid to Providence, and the same amount materializes in the pension fund, or the projected discount rate or some other assumption changes that makes the problem vanish.
That’s if anybody acknowledges that there’s a problem. There’s no rule of law anymore, it seems, and government is not a very good watchdog over itself. According to Riley, Providence has gotten away with this for years; if those who must enforce the rules do not do so, then no rules appear to have been broken, and when the repercussions play out over years, politicians needn’t be caught.
So why should journalists spend all the time to dig into these topics, only to be given the runaround by government sources (whose good will they need for other stories) and made to look like alarmists when the consequences outlast the public’s attention span?
It should not be overlooked that, in her 68-page opinion approving the legal settlement surrounding the state’s 2011 pension-reform law, Judge Sarah Taft-Carter states several times that the suit to overturn the law probably would have failed at trial.
The main statement of this is on page 59 of the opinion…
In particular the Plaintiffs’ likelihood of success at trial is low considering (1) their heavy burden of proof; (2) the strength of Defendants’ position that the Enactments were for legitimate public purpose; and (3) the fact that many other Courts have upheld pension reform, including changes to COLAs.
It’s then repeated on pages 61-62…
Here, as stated earlier, the Plaintiffs’ likelihood of success is low. First, the Plaintiffs bear a high standard of proof in that they must establish that the Enactments are unconstitutional beyond a reasonable doubt…
Additionally, while many Objectors stress the fact that they have a contractual right to their pension benefits, the existence of a contractual relationship is but one element of the Court’s constitutional analysis. Specifically, a statute may still “pass constitutional muster under contract clause analysis so long as it is reasonable and necessary to carry out a legitimate public purpose.”
…and again on page 66…
In addition to the Plaintiffs’ low likelihood of success, the underlying pension cases have been pending, in one case, since 2010 and in most of the other cases, since 2012, during which time all the Plaintiffs’ rights have essentially been in limbo, to say nothing of the ultimate financial situation of the State.
That the suit was unlikely to succeed was a significant factor in Judge Taft-Carter finding the settlement to be “fair, reasonable, and adequate”.
One concern with the pension reform “settlement” that hasn’t gotten as much attention as it deserves is the effect it will have on the General Assembly’s ability to revisit the reform (the shelf life of which, I’m putting at about five more years). Testimony, published on the RI Taxpayers site, from William J. Murphy, before the RI Senate Finance Committee, raises that concern in a bigger way than vague apprehensions would suggest:
Approval of the pension settlement currently under consideration by this committee would produce the disastrous unintended consequence of transforming state pension benefits from their currently advantageous legal status as legislative policies subject to revision by the General Assembly as it judges necessary to best serve the public interest into binding contractual obligations which cannot be changed lawfully by the legislature, even for this vital purpose, through the exercise of its ordinary legislative powers.
Granting passage to the pension settlement legislation negotiated during the union pension lawsuit mediation process would produce this devastating result by introducing the element of “agreement of the parties” into the “circumstances of its adoption,” thereby satisfying the first and most important test of contract existence the courts apply when deciding whether government pension laws create contract rights.
Stephen Beale took a look at government retirees who keep working:
At least 11 retirees in the state pension system had their benefits suspended over the last six years for breaking rules on how much work is permitted during retirement, according to documents the state Treasurer’s office provided in response to a public records request. …
In 2014, approximately 450 retired teachers, nurses, college educators, municipal, and state retirees worked one or more days for a local or state agency.
My statement, in the article, is that the entire retirement system is set up as a sort of abuse. Nothing stops retirees from taking up second jobs outside of government, where their baseline income and, often, benefits give them an edge in the marketplace, versus us private-sector schmoes whose work has to support us fully and lay the basis for our own retirement someday (theoretically).
If government pensioners weren’t retiring in their late middle age (or earlier), their continuing to pick up a little bit of light additional work wouldn’t be an issue.
[The following was received via e-mail this afternoon.]
Concerned Citizen Seeks to Testify about Unfairness of Pension Settlement to Taxpayers at Court Hearing Tuesday, Schedules Press Conference to Explain Request to the Public
Concerned citizen Dr. William J. Murphy will hold a press conference in front of the Frank Licht Judicial Complex at 250 Benefit Street in Providence at 4:30 PM on Tuesday, May 26, 2015 to explain to the public the reasons for his request to testify about the unfairness of the pension settlement to taxpayers at the ongoing fairness hearings in Superior Court. Dr. Murphy will deliver a statement emphasizing that the terms of the settlement itself as well as the impropriety of the court-supervised secret negotiation process that produced it have significantly harmed the financial welfare of taxpayers, violated the political rights of citizens, and severely damaged the public interest.
(EAST PROVIDENCE, RI – May 25, 2015) – Dr. William J. Murphy, a concerned resident of East Providence, has petitioned the Rhode Island Superior Court to testify at the ongoing pension settlement fairness hearing Tuesday. He held a press conference at Superior Court in Providence on Tuesday to issue a statement explaining the reasons for his request.
Dr. Murphy opened his remarks by saying that, “The pension settlement is grossly unfair to good citizens of Rhode Island because it adds over $290 million to the unfunded pension debt that the state’s already overburdened taxpayers cannot afford. Even more troubling, the terms of the settlement itself as well as everything about the nature of the process itself fail to demonstrate appropriate sensitivity to the economic hardships this increased tax burden would impose on elderly citizens living on fixed incomes as well as low-income younger taxpayers and their families who remain deprived of adequate economic opportunities in part because of the unaffordable state pension system, the high rates of taxation imposed to feed it, and the resulting negative consequences for the Ocean State’s economic competitiveness.
On GoLocalProv, Stephen Beale picks up something that’s surely jumped out at anybody who’s spent much time with Rhode Island pension data:
At least two hundred local and state workers retired and started to collect pensions at the age of 45 or younger, according to state pension records obtained by GoLocalProv.
And that’s not counting anyone who received any kind of a disability pension. The remaining list includes state workers, teachers, and local firemen and police who retired under old rules that did not have minimum retirement ages. In all, the 200 early retirees have received $51.1 million in pension payments since they left state or local employ.
Play around with RIOpenGov’s state pension module, and you’ll see that many more are added as the age creeps up to 50 and 55. As I say in Beale’s article, a retirement system shouldn’t be designed as a booster for second careers; it should be a means of providing income during one’s years of aged decline. The system as it stands is a gross abuse of the people of Rhode Island, proving that they work for state employees, not the other way around.
As reported by John Howell at the Warwick Beacon:
CVS Health has found no wrongdoing on the part of one of its employees, former Ward 1 councilman and former chairman of the Warwick School Committee Robert Cushman, in response to demands by the president of the Warwick Firefighters Union.
The union’s president, William Lloyd, threatened a statewide – followed by a national – boycott of the pharmacy chain because of Cushman, a full-time business analyst with the company.
Cushman has been critical of the firefighter and police pension liabilities faced by the city. Firefighters have questioned Cushman’s credentials.
In an email Tuesday, CVS spokesman Michael DeAngelis released the following statement: “After investigating this matter, we determined that Mr. Cushman did not claim to be representing CVS Health or speaking on behalf of the Company when he exercised his rights as a private citizen at a public meeting in his hometown.”
The email continues: “As such, we have no position on his comments. We believe the IAFF Local 2748’s call for a boycott of CVS/pharmacy is misplaced and not warranted. We have a strong track record of supporting emergency responders, and we appreciate all they do to protect our communities.”
Cushman said CVS executives brought Lloyd’s email to his attention more than a month ago. He said the company questioned him, and reviewed tapes of a presentation he made to the City Council in December. Cushman said he was later shown a copy of the CVS reply, which according to DeAngelis closely followed the statement released to the Beacon.
DeAngelis did not feel it proper to release Lloyd’s email to the paper. Cushman did not have a copy.
In an interview yesterday, Lloyd said the letter that was addressed to DeAngelis never called for Cushman’s dismissal, but that because Cushman is an employee “we would not be using CVS anymore.”
“I never made a threat against his job,” Lloyd said. “I never said anything about getting Bob Cushman fired.”
Lloyd said a boycott was not a singular decision, and that the union unanimously voted for it.
“A vote taken by all members, it wasn’t me just spouting off,” he said.
Nevertheless, message sent, no?
Two items in today’s Providence Journal “Political Scene” column make me hope for broad agreement on a proposition. Item 1:
In 2012, Political Scene reported that Kilmartin and his wife, Kristine, derived big chunks of their income the previous year from his $56,862-a-year pension as a retired Pawtucket police officer. When she retired that year, on the cusp of her 51st birthday, as director of the legislature’s data-services office, she started collecting her own $60,030.96-a-year state pension.
Total pensions: $116,893. According to the RIOpenGov payrol application, Kilmartin added $116,611 via his salary as AG. Total income: $233,504.
Item 2:
Former Family Court Magistrate John J. O’Brien retired with two state pensions totaling more than $195,000. …
The retired chief judge of the state Family Court, Jeremiah S. Jeremiah Jr., took another path to receive $207,207 in two pensions — municipal ($22,126) and judicial ($185,648).
Proposition: Can we all agree that it’s simply obscene for households to live this well off the public dime — for work they are no longer doing?
Really. Flip over to the commentary section of the paper, and you see a letter from Lorraine Keyes, of West Warwick, who returned to her Westerly business after a few months away only to discover that an oversight in paying her taxes resulted in not only hundreds of dollars of additional fees, but also a heavy-handed threat that the town would be selling her property two months later if the bill were not paid. Her conclusion:
No wonder people leave Rhode Island as soon as they can. I don’t know if this happens in every town, but it is such a shame that this state tries to drain every cent it can from the average person.
Oh, Lorraine. Even just in the state system, Westerly’s got 245 retired employees taking home up to $95,237 per year.
Don’t you see? They don’t work for us (literally, in the case of retirees). We work for them. Everything you own in Rhode Island, even if you think you built it, is really just a privilege that they allow you to enjoy while supporting their machine. If you’re not going to keep up on your payments, naturally they’ll take it all away.
It appears potentially to be a temporary accommodation, but the weightlifting firefighter retired on a disability pension has thus far managed to keep it:
Former city firefighter John Sauro, described in sworn court testimony as “the poster boy for pension fraud,” will be receiving his pension check again. For how long remains to be seen.
The city Retirement Board voted Wednesday to reinstate Sauro’s $3,902-a-month tax-free disability pension after Sauro reluctantly submitted to a followup medical evaluation to reconfirm his continuing disability. He also handed over updated medical records.
As I sang back in November: “They got me, they got me. Now I’m disabled from tension. They got me, they got me, at least they won’t get my pension… ’cause it’s Rhode Island.”
The Rhode Island media has its eye closely on the drama of the latest proposed settlement of the pension reform lawsuit — that is, the latest attempt to water down a reform that was nowhere near sufficient in the first place. In contrast, Mike Riley is continuing to point out that the state, the labor unions, and retirees are arguing over free drinks on a sinking cruise ship:
The Rhode Island Pension fund is roughly $8 billion dollars invested in stocks, bonds, fixed income securities, Private equity, Hedge Funds, other alternatives and cash. Im keeping the numbers simple here. The state commission, headed by Raimondo, has stated expected return of the portfolio to be 7.5% annually and this is to be achieved compounded over the next 20 to 30 years. A 7.5% return on $8 billion is $600 million for Fiscal 2015. According to the report that Treasurer Magaziner was handed, the return thus far in Fiscal 2015 shows a portfolio (Fiscal ytd )loss of 0.71% and including expenses a loss of 1.03% . This 1.03 % loss translates to a negative $80 million dollars. The State would need to gain $680 million over the next 5 months to achieve their “expected” return.
Bill Rappleye has picked up that thread on Channel 10, but for the segment, General Treasurer Seth Magaziner spit out a bunch of squid oil to muddy the waters, selectively picking five-year investment returns to make it seem as if the state’s pension fund is doing swimmingly. I noted the problem with this happy talk last month:
The ten-year average investment return is only 6.0 percent, which should be seen as -1.5 percent. And the longest term number provided, back to July 2000, is 4.8 percent, which should be seen as -2.7 percent. …
If the average for the last 14 years was 4.8 percent, then the average for the next 14 doesn’t have to be 7.5 percent, but more like 10 percent, to make up the difference. If we’re already seeing diminishing returns from the Federal Reserve’s quantitative easing policy and President Obama’s binge of trillion-dollar deficits, what are the next 14 years realistically going to look like?
More importantly, I suggested, it should be the state’s general treasurer who is making this case to everybody. It should be Seth Magaziner out in the news saying, “Hey, these negotiations are all well and good, but we may only have a few more years left until this pension reform thing starts to spring new leaks.”
Former Treasurer, now Governor, Gina Raimondo lucked out that the Obama Administration and the Federal Reserve proved to be such believers in stock-market-trickle-down theory. Rather than ease the reins on innovators and working people, they’ve hit the loose-money throttle for the investment market. That’s given the pension fund and the reform a brief period of looking like they might be fine, although as Riley argues, the state managed to do worse than other funds during the bubble’s latest inflation.
Mike Riley asks a question on which Rhode Island journalists should follow up: What was General Treasurer Seth Magaziner thinking when he hired a far-left policy adviser whose repeated theme on public pensions and other post-employment benefits has long been that the problem is purely an illusion of accounting?
Further quotes from this policy director [Tom Sgouros] can be found in his scary “The Manufactured OPEB Crisis.” Can you imagine a guy who never managed money being elected Treasurer of Rhode Island in the midst of a pension Crisis and selecting an anti-capitalist political supporter who doesn’t believe basic financial concepts as his policy adviser? Sadly, you don’t have to imagine this scenario because you are living it.
I tend to doubt that the local mainstream media will take much interest in this story, though. It’s “dog bites man.” Rhode Island Democrats take office and fill their ranks with progressive activists. It’s not like the job titles mean anything. Those appointed to the jobs are just there to help build constituencies, to earn a living off of taxpayers while remaining activists, and maybe to lay in waiting for some vacant elective office or other.
Rhode Island is excellent at creating this sort of situation, as Kathy Gregg reports:
The judge in the state’s high-stakes pension case has appointed Frank Williams, the retired chief justice of the Rhode Island Supreme Court, as a “special-master” in the case, as it hurtles towards an April 20 trial date.
Yes, the retired state judge. According to the RIOpenGov state pension module, Williams received $146,605 in pension payments during fiscal year 2013. That’s after 13 years, having put in $159,131 in his own contributions.
Admittedly, the pension system is a tough one, but it is a good example of how a big, intricately active government leads to situations that ought to be laughable. As obvious as the self interest is, it’s less obvious which way it might swing. On the one hand, if the state can modify pension deals, it might one day come for more from Williams and his fellow retired judges. On the other hand, if he upholds the reform as currently written, there’s (slightly) less chance that the legislature will find it necessary to review pensions again.
The interesting part of PolitiFact RI’s review of an income-inequality statement by labor heavyweight George Nee isn’t that the reporters gave him a Mostly False (or couldn’t bring themselves to give him a full-on False), but the line that it draws for the 1% in Rhode Island (emphasis added):
Nee also directed us to a Jan. 26, 2015, report and data compiled by the Economic Policy Institute, another Washington, D.C.-based liberal economic think tank. It compared each state’s highest earners — the top 1 percent — with everyone else.
The institute reports in Table 2 that in 2012, the average income of Rhode Island’s top 1 percent was $966,071 . That’s less than the $1.3 million U.S. average. …
(That report, by the way, concludes that your income needs to be at least $314,647 in Rhode Island to be in the top 1 percent.)
One wonders what sort of people make up this group of roughly 10,000 Rhode Islanders. Investment types, successful business owners, lawyers, doctors, and so on, probably. According to the RI Center for Freedom & Prosperity’s RIOpenGov payroll application, it also includes the University of Rhode Island’s basketball coach and university president. One surprising member of the 1%, apparently, is Neil Steinberg, the President of the Rhode Island Foundation.
Most folks think of the RI Foundation as a mainly charitable organization, but it’s also been investing in socialistic enterprises, like RhodeMap RI, and other political manipulations of the state’s economy. It’s odd to find that effort headed by somebody with (in the Economic Policy Institute’s words) “outsized” income.
It isn’t clear from the liberal think tank’s report whether it’s measuring household income or individual income. If it’s the former, of course, Rhode Island’s government and its satellites would account for many, many more members of the 1%. I mean, even some retired state workers have pensions that would suffice as half of a 1% income level.
If more citizens–in towns, cities, and states–understood the calculations and rhetoric of the pension systems dependent on their taxes, they’d be kicking out incumbents at the nearest opportunity.
When then-General Treasurer, and now Governor of Rhode Island, Gina Raimondo, embarked on her “Truth in Numbers” campaign, enough people understood the problem to help her push through a reform of the state’s pension system, for which she received national recognition. But not enough people had learned the lesson of skepticism, and thusly believed her when she announced the problem had been solved.
Complexity is only one side of the wooden nickel that ought to make Americans wary of allowing government to grow beyond some basic responsibilities. The other side is incentives.
Continue reading on Watchdog.org (and feel free to leave comments over there, too)…
Mike Riley identifies two outrages in the latest report on the state pension fund’s returns.
The first is how poorly it’s doing. For the current fiscal year, the fund is actually losing money. That can’t happen. When you’re relying on fund returns of 7.5%, a loss of 1.3% (since last July, per this Providence Journal article) means that, unless the fund makes up that ground before the end of June, the state will have to realize a 17.1% return next year in order to make up the difference.
(There may be nuances to the numbers that I haven’t done the additional research to catch, but I intend the above paragraph simply as an illustration.)
The second outrage is the spin from elected officials, as opposed to laying out the information for the people of Rhode Island and the state’s retirees. In this, General Treasurer Seth Magaziner (D) is merely continuing the usual practice of government officials on this topic.
If we assume a return rate of 7.5%, we can’t have annual “benchmarks” of 4.4%, whether or not it’s calendar year or fiscal year — as nice as it might be to be able to claim that the fund beat the benchmarks. And sure, we can look at five-year averages, as the latest summary apparently did, but that’s arbitrary on a long-term investment. For one thing, the five-year gain of 8.78% may exceed the 7.5% the fund requires, but at the end of the last fiscal year, the valuation report put the five-year gain at 12.0%. That’s quite a drop.
The longer-term is more important, though. At the end of June, the valuation report put the 10-year gain at 6.9%, which is actually negative 0.6 percentage points from where the state needs to be and which must be lower now, too. What’s more, in June, the return since 1995 was exactly 7.5%. That means that the news of the last six months is that, by the longest-term measure reported, the fund is now doing worse than it needs to do.
And this is all with the benefit of quantitative easing from the Fed and massive government debt from the Obama Administration propping up the investment markets. That can’t continue much longer, which is bad, bad news for the pension fund.