If the people of Rhode Island are going to come to grips with their pension and OPEB problem, journalists (and their editors) are going to have to figure out how the math works.
The entire structure, including the politics, of public-sector pensions is an exercise in kicking a can down the road. It’s been rewarding to public officials to give lavish pensions to government employees, because it wins them votes, the financing confuses most people, and the bill doesn’t come due for decades. A sufficiently aware electorate would be learning the lesson and not being so easily fooled.
Unfortunately, the public isn’t sufficiently aware, and so we get more can kicking. Here’s what I mean:
Lawyers from both sides in the lawsuit challenging the constitutionality of the state’s sweeping 2011 pension overhaul law met in Newport Tuesday for a closed-door status conference with the judge. A court official said the jury trial in the case remains scheduled to begin April 20.
Superior Court Judge Sarah Taft-Carter said last month that she was satisfied that a jury should settle the long-running case. Meanwhile, Governor Raimondo, who as general treasurer crafted and lobbied lawmakers to approve the overhaul, has expressed willingness to try again to settle the case before then.
Why would Gina Raimondo want to settle the case? As the general treasurer championing the pension reform, she expressed confidence that it was lawful far and wide, and even if there’s now doubt, why not get an answer? Of all people in Rhode Island, she should know what a looming avalanche pensions threaten if they aren’t reformed. And of all people in Rhode Island, the governor has a responsibility to guide the state past disaster.
We need to know how far the state can go toward undoing the unreasonable, impossible promises of past politicians, as encouraged by labor unions that gamed the system to control both sides of every bargaining table. The sooner we find out that this reform isn’t constitutional (if it isn’t), the sooner we can get to work finding another — or changing the constitution, if no other reform will do.
Raimondo may still be confident that the state would win its case but wants to avoid the risk; there are two problems of short-sightedness to that approach. First, it assumes that the things negotiated are worth sacrificing, and those things might only be indirectly related to pensions. It’s possible that recent talk about exempting retirement income from state taxes is just a backdoor gimme to the unions, and that expense will require either cuts or taxes in another area. It’s also possible that Education Commissioner Deborah Gist’s job is on the negotiating table, which means that the future of Rhode Island’s children is a possible sacrifice on the pension altar. Is that worth it?
Second, if folks like me are correct that Raimondo’s pension reform was insufficient to solve the problem, then future reforms will be necessary. In that case, if Raimondo’s reform stands because of behind-the-scenes negotiations, future reforms will be much more difficult to enact, because Rhode Island will have a better sense of the legal battle ahead, but without any more legal certainty.
In addition to the points I emphasized here, when I was on the Matt Allen Show on New Year’s Day with Jay Martins, Jay asked me for my prediction about the pension lawsuit.
In a nutshell, I think the law will stand. This is Rhode Island, so the legality of the thing is secondary to the politics, and the cost to the state of seeing the pension lawsuit invalidated, now, would be catastrophic. However, there’s likely to be a backside payoff to the unions.
Seeing Elizabeth Harrison’s RIPR report that the State Board of Education hasn’t chosen to renew Education Commissioner Deborah Gist’s contract (which only means that renewal isn’t guaranteed, but might be negotiated) makes me wonder if that’s one such backside. Rhode Island’s education reforms under Gist haven’t been anywhere near what Rhode Island needs — or what its students deserve — but they’ve definitely been beyond what the teachers unions will willingly tolerate.
Gina Raimondo’s signature reform has a direct budget implication that will make the politicians’ lives more difficult if it doesn’t stand. Gist’s educational reforms have no such immediate pain for politicians, so it’s possible that they may be sacrificed (along with her job) for the reform that does.
Rhode Islanders should keep an eye on this story, out of California:
Striking at the sanctity of public pensions in California, a federal judge ruled Wednesday that U.S. bankruptcy law allows the city of Stockton to treat pension fund obligations like other debts, meaning the city could trim benefits.
State laws vary. Judges vary. Circumstances vary. But this is important because it goes to a broadly applicable principle. U.S. Bankruptcy Judge Christopher Klein is the judge in the case:
The judge spent much of the morning questioning whether CalPERS and its members enjoy a protected status under federal and state laws.
“One can’t mess with CalPERS, that’s the vernacular way of putting it,” the judge said at one point, summarizing the view of CalPERS and Stockton officials.
“Is CalPERS a state unto itself?” Klein mused later.
The labor unions and their backers want everyone to believe otherwise, but the fact that the debt is owed to people who exchanged their work for promises rather than people who exchanged their money for promises doesn’t mean the deal is signed in magic ink that cannot be edited.
Issue 1: Do any candidates for Rhode Island Governor or Rhode Island General Assembly support modifying or repealing Governor Chafee’s Wall-Street-first law regarding municipal priorities?
Issue 2: Will any of the candidates for Governor of Rhode Island have their fiscal staffs look immediately into the possibility of a Providence receivership. Will they tell us if they do?
Issue 3: Buddy Cianci, according to some research done by Michael Riley, once advocated for pension obligation bonds to help finance Providence’s pension system. Might he do so again?
A retired teacher and Providence Journal contributor thinks pension reform gave her a raw deal. Looking at the numbers, it’s difficult to see her deal as a public employee as anything short of spectacular.
From the crowd of people receiving pensions through the state of Rhode Island’s system — 10,884 of them having retired from state jobs — Irene Parenteau has stepped into the spotlight to state that General Treasurer and gubernatorial candidate Gina Raimondo “betrayed” her. She’s not getting cost of living adjustments to her pension, you see, after the reform that Raimondo ushered through the General Assembly a few years ago.
One interesting discovery an investigator might make is that there are actually two Irene Parenteaus in Rhode Island, and both of them have state pensions.
Small state fun facts aside, though, the Irene Parenteau who has entered into politics to make a TV ad for a competing candidate retired in 2010 at the age of 66. According to state records, she had 23 years of service, which puts her hiring with the state at about age 43.
Over those years, Mrs. Parenteau contributed $50,431 toward her own pension., and according to the calculation on RIOpenGov.org’s pension module she will receive an estimated $370,684 in pension payments even if she never sees another cost of living adjustment. That is, over the next 21 years or so, she’ll get back more than seven times what she put in over her 23 years as an employee, even after her “betrayal.”
The average Rhode Islander (let alone those making the decision to leave their home state in search of opportunity) might not much mind being betrayed like that.
My op-ed in today’s Providence Journal places the match of Rhode Island’s experience of the tobacco settlement money (a one-time-fix turned bad debt) on the pile of bad decisions that the state government has made in the past decade or so:
According to a review by ProPublica, Rhode Island has just refinanced some of the resulting debt, with the expectation that “the deal would shave $700 million off a $2.8 billion tab due on the bonds in 2052.” In that regard, it’s a bit like the state’s pension reform, which was marketed as salvation but merely shaved about $3 billion from $9 billion of unfunded liability.
The people who operate Rhode Island’s government are racking up quite a list of these liabilities.
My op-ed in today’s Providence Journal places the match of Rhode Island’s experience of the tobacco settlement money (a one-time-fix turned bad debt) on the pile of bad decisions that the state government has made in the past decade or so:
According to a review by ProPublica, Rhode Island has just refinanced some of the resulting debt, with the expectation that “the deal would shave $700 million off a $2.8 billion tab due on the bonds in 2052.” In that regard, it’s a bit like the state’s pension reform, which was marketed as salvation but merely shaved about $3 billion from $9 billion of unfunded liability.
The people who operate Rhode Island’s government are racking up quite a list of these liabilities.
Justin and Bob Plain pick favorites in some primaries and argue about pensions and government labor unions.
Tom Sgouros’s soothing words about the pre-reform state pension fund should be dismissed… especially by those whose retirements rely on the numbers’ working out in the long term.
RIOpenGov data finds three state employees who managed to triple their income, or more, with overtime.
The RIOpenGov Web site shows 102 state employees who doubled their salaries or more with overtime and other pay.
New transparency releases and updates from the RI Center for Freedom & Prosperity help fill out the picture as Rhode Island follows the pension settlement ping pong.
Multiple sources have reported that the police union members involved in the Rhode Island pension reform lawsuit have voted the proposed settlement down in the first stage of a two stage approval process. According to the arcane rules in place, rejection by one of six different plaintiff groups means the settlement is not supposed to go forward. Judge Sarah Taft-Carter has responded by (what else?) ordering the parties back into secret mediation.
Ian Donnis of Rhode Island Public Radio has posted an unofficial tally of the vote provided by “spokesman for the coalition of plaintiffs in the case” Ray Sullivan…
Teachers: 7,442 eligible, 2,320 ballots received: 31% vote to reject
Retirees: 6,840 eligible, 1,810 ballots received: 26% vote to reject
State: 5,045 eligible,1,697 ballots received: 34% vote to reject
Municipal: 3,261 eligible, 504 ballots received: 15% vote to reject
Fire: 619 eligible, 170 ballots received: 27% vote to reject
Police: 417 eligible, 254 ballots received: 61% vote to reject
It is becoming extremely difficult at this point to see how a “settlement” process could be finished in time for the General Assembly to act on legislation, prior to the end of the session that’s supposed to finish up in early June.
Patrick highlighted, earlier, the peculiar ballot and rules of the voting by which retirees can approve or (by some miracle) reject the negotiated settlement of a pension-reform lawsuit (which has come about by peculiar rules, as well):
… if you’re sent a ballot but never get it, you voted yes. If you forget to return your ballot with a “no” vote, you voted yes. If you have no idea what this is about and you don’t return the ballot, you voted yes. If you moved and the ballot doesn’t make it to you in time, you voted yes.
This may be the most stark example in recent years (which tells you something about how important the settlement is to political insiders), but the only thing that’s really new about this “election” is that the local media is actually adopting a mild tone of incredulity, this time. It was only a few months ago, after all, that the SEIU held a successful election to unionize independent child care workers whose clients receive government subsidies. Amidst unjustified threats of arresting observers and other peculiarities, most of the coverage and incredulity came from, well, us.
That election achieved a pro-union vote just shy of the Crimea’s “Soviet-style, 97-percent vote to secede from Ukraine.”
And yet, a small, private free-market think tank — the people raising questions about these and other harmful and suspect Rhode Island realities — is the organization that sparks the most skepticism in local political reporting.
Of course, this is exactly the sort of thing that a villain would say, but with Rhode Island’s economy falling apart and with Rhode Islanders giving up hope, it just might be time for certain folks to readjust their understanding of whom the good guys and the bad guys are.
The only option on the ballot sent to retirees on whether they accept the pension settlement deal is “no”. If they don’t return the ballot, it counts as a “yes”. What if we did that in other elections too?
After Providence Journal reporter Kathy Gregg tweeted that “only 24,297” ballots went out to retirees to vote on whether to accept the pension settlement, I took a look at RI Open Gov’s pension module. Gregg says she counts 31,829 retirees in the state system. RI Open Gov lists 27,864, but if you take out “beneficiaries” (people who inherited workers’ pensions), it drops to 25,108. The ballots being sent out may also subtract those who get to vote through some other means, like a retiree group set up specifically to negotiate the terms of the settlement.
While I was playing with the spreadsheet, though, I noticed Elizabeth Blythe, who appears to have retired in 1950 after 20 years with the state police at the age of 36.
Think about that. In 1950, Harry S. Truman was president. World War II was a recent memory, the United Nations and NATO were new, and the United States had just airlifted supplies to West Berlin in response to a Russian blockade and responded with military force to the North Korean invasion of South Korea.
The cycles of history move slowly, but it’s amazing to know that Rhode Island is still paying for employees who haven’t worked for the government in almost as long as my children’s grandfather has been alive. With modern medicine, we can be sure that Ms. Blythe’s future counterparts will not be quite so few in number when my children are doting on their own grandchildren.
The other day, Glenn Reynolds linked to this article about the predicament of San Jose, in which paying for the government’s workforce, especially its pensions, is eating up an ever growing amount of the budget:
“This is one of the dichotomies of California: I am cutting services to my low- and moderate-income people . . . to pay really generous benefits for public employees who make a good living and have an even better retirement,” [Democrat Mayor Chuck Reed] said in an interview in his office overlooking downtown.
This outcome is probably inevitable once we allow the people employed in government to bring in union organizers whose primary service is to keep employees’ remuneration growing. The employees get a vote at the negotiating table, and they get a vote at the ballot box. They can create an atmosphere of great reward for politicians who’ll be pliant as they represent taxpayers in contract negotiations.
Then, when the labor organizations merge into national behemoths, they become a shadow government, able to shift resources around the country and stick with (or oppose) politicians throughout every layer of government.
Of course, public sector unions gain other advantages. Because they’re negotiating with government, whose cards must be open to public review, their negotiations can become something more akin to demands. And because the employees ultimately perform the work that elected officials manage, they’re in a position to make them look good or bad. (Think the Cranston parking ticket scandal.)
It isn’t at all surprising that, under these circumstances, the central focus of government becomes supporting its employees, even as all of the things its supposed to be doing (they’re supposed to be doing) fall by the wayside for lack of resources.
Fans of government data have been cynical and despondent over the failure of the state’s Division of Municipal Finance to update its online data for most of Governor Chafee’s term. Happily, the division appears to have updated the data and made it more interactive.
One of the first things this provides is an opportunity to explain, once again, how dire the municipalities’ unfunded liabilities are. I’ll use Tiverton as an example.
As of 2012, Tiverton’s police pension was only 50.6% funded, with an unfunded liability of $6.5 million. Per the latest data posted (I think 2013), our “other post employment benefits” (such as healthcare) are 0.0% funded, with an unfunded liability of $24.5 million.
What “unfunded liability” means is that we would have to have that much money in the bank in order for regular payments and investment returns to be enough to cover the promised expenses. (If memory serves, Tiverton currently assumes 7.5% investment returns.) That is not the amount that Tiverton has promised to pay, which is probably in the high tens or hundreds of millions.
In other words, if we had $37.7 million in the bank, were making our regular contributions every year, and investment returns were bringing in $2.8 million every year, that would be enough to keep the program going forever. (It’s actually a scam that doesn’t work that way, but we’re talking the theory, here.)
But we don’t have that. We have $6.7 million in the bank. That means we would have to put in $31 million right now to have what we need. Every year that we don’t do that, the liability grows, because investments are only bringing in around $500,000 (long term, in theory).
(The biggest problem, other than not having money in there, is that assuming 7.5% returns on long-term investments is crazy.)
In general, this would make it tough for local taxpayers to demand low or no tax increases, but since local governments aren’t funding the liabilities in the first place (or demanding less lucrative contracts), we’re only compounding the problem by taxing people more and taking properties off the tax rolls, as Tiverton just did. If our cities and towns aren’t going to protect us from the coming catastrophe, people should be allowed to keep their money and make their own financial decisions in order to be able to pay for the catastrophe when it happens (or afford to escape!).
The proposed “settlement” of Rhode Island’s 2011 pension reform law (has anyone explained yet how a law can be mediated?) is currently in the hands of rank and file union members. If they give the green light (has anyone explained yet how a non-ballot can equal a “yes” vote?), it goes to the General Assembly for consideration.
But let’s go back to the 2011 pension reform itself. First, look at this three page PDF, compiled by the state of Rhode Island, which lists “Locally Administered Pension Plans in Critical Status”; i.e., municipal pension systems. See the note in the box on the bottom left of each page?
Straightening out the pension reform settlement agreement is no easy task, but it appears that 21,000 retirees are in a position akin to that of regular Rhode Islanders year in and year out.
Which way should the General Assembly go on taking up the pension settlement bill? That’s got to be what Speaker Fox and President Paiva-Weed are wondering now. Or maybe not. In a joint message reported by Ian Donnis: “We will await the votes to be taken by both union and non-union members before we weigh […]
The other day, I noted how Rhode Island’s civic system treats government employees as a “special class.” Well, now some are complaining about the proposed pension settlement:
For retired state worker Brian Kennedy [a former human resources supervisor], the proposed pension lawsuit settlement — unveiled late Friday after months of closed-door negotiations — was disappointing and insulting.
The 66-year-old North Providence resident, who worked 33 years in state government before retiring in 2005, says retirees bore the brunt in the settlement, not the active government workers whose labor unions hammered out the agreement with Governor Chafee and state General Treasurer Gina Raimondo’s offices through a court-ordered mediation process.
The data that the state gave to the RI Center for Freedom & Prosperity for its RIOpenGov pension site differs a little from what’s reported in the Providence Journal, but it shows a Brian L. Kennedy who retired in 2005 at the age of 57, with 35 years of “credited service.” Over his career, Mr. Kennedy put $97,272 into his pension, and as of the fiscal year 2013 report, he had already received $575,758 back.
Multiplying his FY13 payment of $67,844 by his life expectancy (i.e., no COLA ever again), the site estimates that he’ll get back a total of $1,881,657. That’s 19 times his investment, bringing in significantly more than the median Rhode Island income annually for almost thirty years of retirement.
Put differently, it will be as if the state paid Mr. Kennedy an extra $53,762 beyond his salary for each of his 35 working years.
We should definitely have sympathy for the people whom the state and labor unions took in with promises that could never be kept, but come on. A little grace and community spirit from the people who make so much of having “served” the public would be in order. After all, taxpayers are supposed to simply accept the constant increases that they face at every level of government or face accusations of selfishness and greed.
I’ve been having a Twitter discussion with a just-retired Providence teacher who’s known around the local Internet as “Snow.” She isn’t happy with her union leaders because, as she argues, she now would have been better off putting those pension investments in the stock market for 30 years.
A quick check shows that, from 1982 to 2013, the compound annual growth rate (CAGR) of the total market was 10.5%. That is, indeed, higher than the 7.5-8.0% (or whatever it might have been before) that the state government has been assuming for its bookkeeping.
In both her calculations of the stock market and her estimates of what she’ll have throughout her retirement, however, she completely ignores risk.
For the long-term investment of a pension, it would have been reckless of Snow to put 100% of her investments into stocks. That’s why the pension fund mixes stocks with safer investments.
Who could have guessed, back in 1982, when it was considered a dire predicament that the national debt had crossed the one-trillion-dollar mark, that the federal government would continue inflating the market with so much debt? We’re now over $17 trillion, adding about one more per year, every year.
On the other end, who really expects this to continue for the twenty years or more of Snow’s retirement? In the shadow of that ominous thought, a guarantee of six times what she put in looks like an enviable deal.
But let’s turn to unemployment. Supporters of a government-driven economy have been brushing off concerns about the unemployment and labor participation rates as simply a consequence of an aging population. In that case, was it wise to base so much of our economy on national debt, and is it wise to drown the chickens in even more, as they come home?
The bottom line is that Snow’s generation built its sunny expectations on the backs of mine and those after, with the public sector layering on another thick layer of graft. It can’t last.
The promises that her union extracted were unreasonable; the guarantee is fanciful; and I fear history will to prove the demands to be the height of selfishness, in retrospect.
Most of the many things that can be said about the proposed settlement on the unions’ lawsuit challenging the pension reform law, I’ll leave for later. You can peruse the various related documents, including the legislation that the General Assembly must past without amendment, some summaries, and the actuarial document, here.
The basic analysis is this: As I’ve said too many times to pick a link, the reform wasn’t adequate as it was, and this makes it even less so.
But there’s a more important broad-stroke point to pull from it all. Russell Moore articulated it succinctly on Twitter, but we can be sure that it’s the feeling of many and will be repeated many times in the halls of the State House. Explaining why I shouldn’t be so negative about the deal, he wrote:
because it maintains 94 percent of the savings and you no longer have to worry about some judge throwing the whole thing out .
That’s pretty much the attitude to which Rhode Islanders have been beaten, isn’t it? Shhh… at least we’re getting away with something! Don’t anger the insiders and special interests.
We need to change the attitude in this state. Reality is going to force us to do so. It’s just a matter of how painful it’s going to be.
Reforms have to be implemented and then expanded, not implemented and then we all cross our fingers and hope that a corrupt judiciary doesn’t throw them out because special interests complain, or a corrupt electoral system doesn’t allow the unions to flip enough seats in the General Assembly to undo it all.
This isn’t good enough. We deserve better.
Justin and Bob Plain discuss the pension mess (and Justin adds a bit of after the fact textual elaboration).
I find myself thinking of the tens of thousands of Rhode Islanders who are unemployed (including those who no longer tell government pollsters that they are looking for work) and the thousands of struggling self-starters and small-business owners and wondering what they think when they read the Providence Journal. Consider:
The start of the new legislative session sparked raises of up to 22 percent for more than two dozen General Assembly staffers, a high-level promotion and the hiring of another former state lawmaker.
Promotions: Lawyer Frederic Marzilli was promoted to director of … Legislative Counsel … salary up from $90,458 to $121,566 a year. He replaces John O’Connor, who was given a new title — “senior legal counsel to the Speaker” — at the same $116,890 salary he had before.
And so on. From a different segment of the same link:
[Matt] Jerzyk, who held a number of titles in Providence City Hall, including deputy city solicitor, has been named legal counsel for the House Labor Committee … Jerzyk also serves as legal counsel to the House Small Business Committee… He is being paid $2,500 a month for his work on the two committees…
Jerzyk is also city solicitor in Central Falls and consulting on Providence City Council President Michael Solomon’s campaign for mayor and former state General Treasurer Frank Caprio’s bid to regain his former job as treasurer.
And then there’s the Foster teacher complaining in an op-ed about pension reform:
The reduction and suspension of the cost-of-living adjustment for state retirees is just one component of the pension reform that the legislature adopted during the 2012 legislative session. The other two components that no one chooses to discuss are deep cuts to the defined benefit of the teacher or state employee and the additional requirement that they work years longer to attain their deeply reduced pensions.
Of course, circulation numbers suggest that much of Rhode Island’s struggling population isn’t reading the Providence Journal, perhaps because of demographic shifts, perhaps because they’re all too busy struggling, or perhaps because it’s become a conduit for sowing hopelessness among them, so why bother.
The theme of 2014, so far, appears to be one of denial, specifically data denial — at least within the pro-big-government alliance. Ignore the unemployment rate. Ignore the hundreds of wealthy Rhode Islanders leaving (on net). It’s a good thing that ObamaCare is slated to cause millions of jobs to evaporate.
Now the meme has progressed to pensions. Responding to the revelation that Providence’s pension system is less than 40% funded, even after “reform,” firefighter union president Paul Doughty doesn’t express outrage, or even concern, over the threat to his members’ retirements, but rather alleges an investment-advice conspiracy:
Some investment experts recommend an even lower rate [when calculating predicted investment returns]. Moody’s Investors Service recommends 5.5 percent. Investor Warren Buffet has suggested 6 percent. …
A lower rate would dramatically increase estimates of the unfunded liability, Doughty said: “The calculation at that point is the fund is much more—much more—unfunded.”
Higher estimates for an unfunded pension liability becomes an impetus for further pension reform, potentially including the creation of individual retirement accounts, instead of (or addition to) one pension fund with contributions from all workers pooled together, Doughty suggested. When financial institutions are processing transactions for thousands of workers, rather than just city, they stand to make more money, he concluded.
Never mind that the bread and butter of investment advisors is proof that they can be accurate. It’s also a bit odd to think that a company would rather have to compete for thousands of small accounts than have ownership of a handful of very large accounts.
The biggest problem with Doughty’s conclusion, though, is that a higher discount rate requires the pension fund to gamble on higher-risk investment products, which require more supervision and advice. (Hence the argument over fees for hedge funds.)
If the discount rate (i.e., predicted investment return) is a few percent, the advice would be to buy a bunch of long-term bonds. If the discount rate nears 10%, the advice is: “Give me a bunch of money to analyze the market and find the most profitable investments on an ongoing basis.”
Here’s something mentioned in passing that jumps out of Steve Frias’s op-ed in yesterday’s Providence Journal (emphasis added):
In a Democratic primary, the incumbent was defeated and in his place John Nardolillo Jr., the president of the Johnston police union, was elected. Although City Council President Kevin McAllister accused the police union of hijacking the council, Nardolillo became chairman of its Finance Committee. Under Nardolillo’s stewardship, the City Council balanced the budget by dramatically raising taxes and using up most of the assets in the city’s pension fund.
It would be too much to expect to find union-backed municipal authorities in every Rhode Island city and town who led the way to underfunding pensions, but it’s certainly a broadly applicable lesson. Whether explicitly union candidates or not, elected officials have used pensions as a cost-lite way to promise total compensation of which taxpayers would never approve if there were (as they say) truth in accounting.
Rather than try to give even larger raises and immediate benefits, they’ve promised long, comfortable retirements, and then stood by as the money put aside to pay for that future expense was used elsewhere or never put aside in the first place. They knew that — by politics or by courts — the unsustainable promises that their supporters had made years ago under false pretenses would not be substantially undone when the bill came due.