Liabilities Revisited

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!).

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