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Magaziner’s Municipal Pension Plan May Help Some But Little for Providence

Sunday, April 02, 2017

 

Seth Magaziner

General Treasurer Seth Magaziner talked extensively with GoLocal on Friday and outlined how his recently released Healthy Local Pension proposal could help some of the smaller municipal pension programs. 

But, Magaziner admitted that his plan is not the immediate  solution to the significant and longstanding pension problems in Providence. The capital city’s unfunded pension obligation boarders on $1 billion.

“Ultimately it's going to be on Providence and their labor groups to do the heavy lifting of finding a solution together. We're offering choices, they can decide,” said Magaziner.

The Magaziner Plan

“So big picture, there are 150 local pension plans, and 116 are managed through MERS (Municipal Employee Retirement System) already and 34 are locally managed. The 116 are on average 83% funded - none are below 60%,” said Magaziner.

According to the proposed legislation This legislation provides municipal pension plans with a more flexible pathway to enter MERS — if they choose to do so.  The advantage for these pension plans is that this offers longer amortization periods and allowing certain parts of the benefit structure to conform to MERS benefits gradually instead of immediately—provided they still meet acceptable actuarial guidelines, and benefits are not more generous than other MERS plans.

“Most locally managed plans (outside the state system) are in pretty tough shape -- of the 34, a majority are below 60%, and a lot even below 40% funded,” said Magaziner.

Magaziner told GoLocal that there are clear advantages to the systems and to retirees.

“Why does MERS do better? One is the economy of scale -- an $8B system has a broader-based spread cost. It's 10 basis points for legal, actuarial, and administrative costs -- low overhead, because we're so much larger,” said Magaziner.

Providence's massively underfunded pension system

For Providence and other Communities in Distress - the Problems are Big and Complex

Magaziner admitted that his team is still collecting a lot of data and that his plan is not going to fix communities like Providence.

“We've never claimed this is the cure to every pension problem in the state -- there is no silver bullet, no perfect solution.But we can provide value by lowering costs and improving investment performance,” said Magaziner.

A number of business leaders including former Hasbro CEO Alan Hassenfeld claim that the pension obligations are so detrimental that the City should seek bankruptcy to shed the pension obligations.

"The reporting is shoddy by community - we've asked for administrative costs. Based on initial data we see so far, there will be savings," said Magaziner.

•    The MERS pathway may make sense for municipal plans where: 

o    Local benefits are less generous than MERS;
o    Employee contributions are more expensive than MERS;
o    The local plan has a longer amortization period than MERS;
o    Critical underfunding has made entry unaffordable under current option.

When asked if the shift to the state system would shift cost burdens, Magaziner said no,"The state of RI will pay nothing -- MERS is support by communities. When a community comes in and new costs are theirs."

 

Providence Finances - Benchmark Report - 2016

 

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