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Michael Riley: Analysing A Crisis

Tuesday, February 11, 2014

 

Municipal pension reform has become a big issue for Rhode Island, but do we really understand the problem?

Now that we have all the media talking about municipal pensions (which is great) let’s try to produce a set of consistent comparable numbers that fairly describe the crisis. Make no mistake; this is a Rhode Island crisis. Unfortunately, there is a widespread lack of understanding of the real numbers and in Rhode Island, most of us have a healthy skepticism about “spin”. I have sought to standardize the numbers so we can make ”apples to apples“ comparisons among the towns in Rhode Island and across the country.

Despite some recent media gaffes and confusion about pensions and proper accounting, it is still possible to correctly frame this critically important debate. The municipal pension issue is by far the biggest factor in Rhode Island today. It is threatening our lifestyle, town by town, city by city—potentially devastating our citizen’s finances and the next generation. This crisis and finding working solutions will be a central political issue this year.

Level the playing field

Not only have I already created a recognized report and template for analyzing Providence by utilizing Stanford GSB metrics, but I have conformed all my findings to the criteria Moody’s will be choosing to rate municipal debt. I am using this template for every town. Rhode Island officials have been notified by Moody’s that the ratings agency has doubled their emphasis on pension under funding and established a variable discount rate assumption ranging from 3% to 6%—not a ridiculously high 8.25% like Providence uses, or 8% for West Warwick and Fireman Doughty, or SEIU 9%, or even the 7.5% the state uses. Every town will be adjusted to Moody’s 6%. Additionally no more “smoothing assets” like Providence has done. All town officials should know the market value of plan assets at all times. Many other cities have violated this obvious GASB change as well and the accounting profession is banning this practice of smoothing.

If the RI Municipal Pension Study Commission were actually fulfilling its function, we would know all the industry changes and acceptable accounting. Cities would be warned to comply. Instead, it’s become another commission boondoggle covering up pension disasters like Johnston, West Warwick, and Coventry. I thought the Pension Commission's main purpose was to shed light on the condition of RI towns. Why then, do they not standardize terms? Why don’t they draw attention to sloppy or unlawful accounting employed by “critical status” towns? Did you know, for example, that Commissioner Polisena’s town of Johnston (which is deep in critical status and less than 20% funded, and where he has been mayor since 2006 and a former fireman) includes the following extras in determining the pensionable salary of a fireman in Johnston?

  • Salary/wages
  • Unused sick time (added to salary to calculate pensionable salary)
  • Unused vacation pay (same as sick time)
  • Overtime (75% of overtime pay added to salary for pension calculation)
  • Longevity pay (added to salary)
  • Clothing allowance (added to pay and taxpayers will pay for next 25 years even though retired)
  • Maintenance pay (Possibly; maybe citizens of Johnston can figure this one out)

 

This form of pension spiking must go...

The higher the pensionable salary definition, the higher the retirement benefit and the higher the cost to taxpayers. So what has Polisena done since his 2006 election?

Mr. Polisena is heard constantly complaining that it's not municipal-defined benefits that are the problem, but rather it's lack of state funding. Here’s a quote reported by WPRI at the very first Commission meeting: “We inherited a lot of bad decisions in the past. We have to live with it,” Polisena said. But Carcieri “did not help.” The mayor suggested that Central Falls and East Providence might not have their finances under state oversight today if the cuts hadn’t been made. He says it is the “state taxpayers “ who should help him pick up the costs of Johnston’s pension plan. Why? Perhaps some benefit cutbacks make more sense. Just review the fireman example above. How can other towns listen to this whining and witness lack of local action among commission members, sitting there right next to union reps, and then take this commission seriously? Taxpayers from other cities and town shouldn’t have to subsidize Johnston’s corrupt practices such as pension spiking.

In addition to a commission that is stacked against taxpayers, there is the ineffective leadership of Chair Gallogly. Some towns that have been “called on the carpet“ have become rebellious. At least two towns have openly mocked Gallogly‘s authority. Coventry has threatened to sue the commission, and West Warwick has smirkingly missed deadline after deadline for 2 years. The commission has lost significant importance and respect and we can expect that they will continue to drag their heels until Governor Chafee and all his appointees leave at year's end. This may unclog the process, but we’ve wasted 2 years of the so-called “Year of the Cities and Towns” under the Chafee administration as unfunded liabilities compound dramatically.

So because the commission is failing in even a basic way, I have instituted a ratings system that I believe the public can understand. I will review the true condition of localities like Coventry and Johnston. They will be compared to bankrupt cities in America and to average cities. It is quite possible that several Rhode Island towns will be in receivership before we’ve had time to dissect all the issues. I will attempt to review the Auditor General's list of critical plans first.

For towns that are rated terminal, and there are some, it’s game over. Only receivership can help the town turn the corner to sustainability. Let's start with two new towns for our rating system: Coventry is rated terminal and Johnston is rated critical.

Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC news, Yahoo TV, and CNBC.

 

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