It’s always encouraging to see evidence that one’s analysis is likely to be correct, but it’s disconcerting to see the consequences moving so quickly.

An excellent Randal Edgar article in today’s Providence Journal points to gathering clouds on the pension horizon:

The audit by Cheiron, an actuarial services firm based in McLean, Va., looks at recent reports and studies provided by the state’s pension consultant, Gabriel Roeder Smith & Company, giving their work positive reviews.

But in its recommendations, the Cheiron team — citing conclusions in a recent Gabriel Roeder Smith & Company study — says the board should “consider lowering” its assumed 7.5-percent rate of return because there is only a 40-percent chance the yields will be that good over a 20-year period.

Asked at the Retirement Board meeting Wednesday how low the assumed rate of return would have to go for the $7.7-billion fund to have a 50-percent probability of yielding its expected returns, Cheiron’s presenters said they did not attempt to calculate that number.

The article goes on to note Treasurer Gina Raimondo’s suggestion that the Retirement Board would look at the fund’s experience next summer, and the state’s actuary again raised the goal of fifty-fifty odds of meeting their investment needs, saying it would require another half-point decrease, to a 7% discount rate (or investment return assumption).

Let’s pause for a moment to ask: Fifty-fifty?  That’s the target?  A pension fund should be almost riskless!  In order to budget, state and local governments need to know how much it costs them to have employees.  In other words, retirees’ pensions should be accomplished with funds paid in while they’re still employees.  That doesn’t work if there’s a fifty-fifty chance the employer is going to have to pay more money into the fund down the road.

And that’s where we get to the real clincher of the point that I made when I was arguing the discount rate problem back before the pension reform passed.

1. By the numbers, the hybrid plan (with a defined benefit component by which the government promises certain payments and a defined contribution by which the government gives employees funds to invest on their own) concocted for the pension reform actually costs more.
2. Rough calculations suggest that the hybrid will only become cost effective when the actual returns drop closer to the level that financial experts begin to call “riskless,” meaning well below 5%.
3. If the state reduces the discount rate enough, or if the returns are low enough, it will drop the state’s funding ratio low enough for long enough to trigger a scenario in which the Retirement Board effectively gives the General Assembly two follow-up-reform options, and the default (if the General Assembly does nothing) cannot reduce benefits at all.

Given the structure of the law, it takes some years of poking around with the pension fund before we get to the point of the Retirement Board’s telling elected officials what they have to do, but the fact is: The pension reform over which people across the country have been fawning was not adequate over the long term, and it certainly looks like I was correct to suggest that the union members got a pretty good deal.  Taxpayers, not so much.