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Michael Riley: RI Municipal Pension Study Comm. Is in Failure Mode

Tuesday, April 08, 2014

 

Michael Riley asks, Does anyone take the pension crisis seriously?

In light of Narragansett and West Warwick’s recent press reports summarizing their respective action and funding improvement plans, I was moved to review how this commission—which was born out of crisis—could have turned into such a disaster. They have tacitly endorsed kicking the can once again and provided cover for irresponsible “critical status” communities, which has further exacerbated the pension and OPEB liability crisis. The once roaring lion chairman and director of revenue of April and May 2012, that openly threatened towns like Coventry and West Warwick to “shape up or else,” has turned into a toothless bureaucrat that virtually no one respects.

In January 2012, Chairperson Rosemary Booth Gallogly laid out the mission and role of the Rhode Island Pension Study Commission during the group’s first meeting by asking commission members to review the Retirement Security Act of 2011 and the statutory requirements for the Study Commission. That was easy. Then Gallogly urged the commission to quickly develop a set of priorities. So far so good.

Playing politics from the start

But then, minutes after these organizing comments, Johnston Mayor Joseph Polisena immediately let us know why he was on the commission and what his goal was. Within the first 20 minutes, of the very first meeting, Mayor Polisena stated that “ his community had incurred an $8.8 million decrease in State Aid between 2007 and 2011….and If Johnston and other communities had not received cuts in State Aid and were not subject to unfunded state mandates perhaps Johnston and some cities and towns would not be in the financial position they are in now.” He stated this before any priorities had been set and before any studies had been completed or submitted. Maybe he should have said, “It’s not my fault or the cost of benefits or anything we did. It was the previous Governor’s fault.”

So there it was, Carcieri under the bus and within the first half hour of the first meeting one of the major weaknesses of this commission were revealed. The Mayor of one of the most “Critically underfunded” cities in the United States chose that particular moment to whine about the previous Governors reduction of aid to cities and towns. Johnston has $180 million of unfunded pension liability and $229 million of unfunded OPEB liability. The $ 8.8 million that Mayor Polisena talked about was literally a drop in the bucket. So Mayor Polisena decided this was the time and place to play politics. That was a very ugly start but maybe the problem with this ineffective commission was the structure and membership.

In failure mode

I have already determined that this dying commission is in “failure mode” and is winding down its never determined reason for existence but that doesn’t mean that each and every member should not be held accountable to the people of Rhode Island for their actions or inaction. As such, each of the members will receive grades (A thru F) and a thorough review scrutinizing the actions of the committee and committee members. Thankfully as a result of good government groups and public meeting laws we have access to the minutes of all the meetings, the attendance of members, the reports and compliance from critical status towns that were received and reviewed by the commission. This will provide a real set of information to determine how well this commission and its members have done addressing this crisis.

Attending last week’s Pension Commission meeting was extremely illuminating. The Pension Study Commission that was formed to address the municipal pension crisis barely had enough attendance to discuss the issues (next steps) and struggled to get to a quorum. Providence Mayor Angel Taveras, whose pension fund is 19% funded and Mayor Polisena, whose is 21% funded, did not attend the meeting or even bother to send a representative. They were instead reported to be at the Congressional delegation breakfast. Does anyone take this crisis seriously?

For those who still care about this crisis, the accountability of the commission, and the appointed members to the citizens of Rhode Island, the grades will be issued both through GoLocalProv and my blog http://rishrugs.blogspot.com/. For a full list of commission members, click here.

 

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.

 

Related Slideshow: Providence Pension Liability

A new report shows that Providence’s pension fund—even after the recent reform—is still in trouble. The below slides break out the key numbers for the pension fund, including the unfunded liability, the assumed and actual rates of return, the current level of benefits, and how long it will take the city to pay off the unfunded liability. Figures are current as of July 1, 2013 and are taken from the new Jan. 31 actuarial report from Segal Consulting.

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Unfunded Liability in 2013

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Unfunded Liability in 2011

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Percent Funded in 2013

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2013: 31.39%

Percent unfunded in 2013: 68.61%

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Percent Funded in 2011

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2011: 31.94%

Percent unfunded in 2011: 68.06%

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Rate of Return

Former Assumed Rate of Return: 8.5%

New Assumed Rate of Return: 8.25%

What the state’s assumed rate of return is: 7.5%

What Moody’s Investors Service says the assumed rate of return should be: 5.5%

What investor Warren Buffet says the assumed rate of return should be: 6%

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Actual Return on Investment

Actual Market Return in FY 2012: 1.49%

Actual Market Return in FY 2013: 11.35%

Current Assumed Rate of Return: 6.42%

Average Market Rate of Return for FY 12 and FY 13: 8.25%

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Impact of Lower Rates of Return

$72 million:The city unfunded liability increased by this amount when the city lowered its assumed rate of return by a quarter of a percentage point, from 8.5% to 8.25%

$506.2 million: The estimated increase in the unfunded liability were the city to use the 6% assumed rate of return recommended by Moody’s Investors Service.

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Retiree Pay – Fire and Police

Number on Active Duty: 834

Average Annual Pay: $61,325

Number of Retirees: 587

Average Retiree Age: 65.3

Average Retiree Annual Pay: $40,512

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Disability Pensions – Fire and Police

Number on Disability: 418

Average Age: 64.8

Average Annual Pay: $59,028

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Retiree Pay – Other City Workers

Number of City Workers: 2,164

Average Annual Pay: $38,687

Number of Retirees: 1,453

Average Retiree Age: 72

Average Retiree Annual Pay: $18,252

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Disability Pensions – Other City Workers

Number on Disability: 88

Average Age: 66.8

Average Annual Pay: $18,684

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Current Cost of Pension Fund

For 2013

City Contribution: $58.1 million

Employees Contribution: $10.9 million

Net Investment Return: $18.1 million

Cost of Retiree Benefits: $95.4 million

Note: Net investment return is the return on investments after investment and administrative fees have been paid.

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Cost of Pension Fund in 10 Years

Normal Cost: $9.8 million

Additional Cost Because

of Unfunded Liability: $84 million

Total Annual Cost: $94.3 million

Note: Total figure for the year includes a small second payment for the deferred liability.

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Cost of Pension Fund in 20 Years

Normal Cost: $13.9 million

Additional Cost Because

of Unfunded Liability: $118.5 million

Total Cost: $132.4 million

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Paying Off Unfunded Liability

Average annual increase: 3.5%

Number of additional years to pay off: 27

Fiscal year unfunded liability to be paid off by: 2040

 
 

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