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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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Comments:

Michael R. - Please explain. If this commission is such a failure, what moved West Warwick to recently propose and have stakeholders agree to what appear to be significant plan changes.

Comment #1 by Roy D on 2014 04 08

Roy D I havent seen the changes and I strongly doubt they were even close to being effective and thats the whole point. So If you have info and can compare this agreement with what was submitted to the commission a year ago then I will review. until then this is political spin from 2 ineffective organizations the city and council of West Warwick and the Municipal Pension Commission.

Comment #2 by michael riley on 2014 04 08

Are there any Republicans in Johnston? Looks ike the hack mayor is casting about for one to blame for decades of footsey wootsey between the always in power democrats and the unions. Right out of the Obama playbook. Us...US, surely you JEST.

Comment #3 by G Godot on 2014 04 08

Interestingly, there apaprently are a few Republicans in West Warwick, perhaps that's why there might be some "progress" on the pension front there.

Comment #4 by G Godot on 2014 04 08

Mr. Riley:

It will be interesting if Narragansett's Town Council actually steps up to the plate and enacts the Town Manager's budget calling for a 4% tax levy to begin to fund what the Town actually owes. This same Council failed to follow the advice of it's own town manager last year. Since it is an election year, I would imagine that the Council will not pass the 4% instead blaming benefits which are "too generous" even though in effect for more than a decade. One can only wonder the state of the pension plan if the Town had fully funded their obligations like they did before 2002. Meanwhile, more bonds for athletic fields....

Comment #5 by Gansett Proud on 2014 04 08

Mike I like what informative information you are putting out there for the public to know but doing it on this website is not getting it out to the public. I do agree with you about many of the problems you are raising especially in Providence with the biggest cover up taking place by Taveras. Why don't you think he wants out of there. Also did you know that when a new mayor gets elected in Providence he will uncover the same category 5 hurricane and the pension settlement can be and will be thrown out and more changes will be made. It is these elected officials who get involved in politics to line their own pockets and the pockets of their friends, (TAVERAS, FOX, CICILLINE)well known to travel in the same circles if you get my drift. Putting all the blame on Unions isn't the complete story. I worked in NY after the military and bloomberg killed police, firefighters and teachers. These are difficult jobs to do I think more applause for these workers is necessary today and MORE investigating POLITICIANS is REQUIRED. When you choose to go into these type of professions a decent retirement is well deserving whether you work one day or many years because it is the unknown of what your going into that can take your life instantly. I know you ran for office why God only knows but I think you learned a valuable lesson that people will tear you down in RI especially political hacks who don't want to be exposed. Mike be more agressive tearing down politicians not police and fire. There isn't a politician in this country that could have walked in my boots and do and see what I have been through in battle and in employment. The scars you carry the rest of your life and also Police, Fire and Military don't live long lives. I repeat tear down the deserving cast of characters in RI. You know the names now get to work. Thank You
JT

Comment #6 by Jackson Teller on 2014 04 08

JT thank you for your views. I very much respect what you have to say and i agree political corruption is at the root of this problem.I am diligently trying to point out the hypocrisy and lack of accountability.Police and fire have real heros in their ranks.The same cannot be said for many other covered public employees.I still believe most everyone in public service wants to do the right thing and is dedicated but the union bosses and politicians have often sold their souls and have left us with a huge problem. It can be fixed but not without lots of pain.

Comment #7 by michael riley on 2014 04 08

Mike, I do agree with you on public employees that is because they are political appointments and each new administration hires more and the old remain. Look at Taveras he hired a convicted felon and has him hidden at the water supply. Political I say. People need to speak out good to see you doing it.

Comment #8 by Jackson Teller on 2014 04 08

Mike and Jackson, Any rift between government employees and taxpayers could be solved with an end to defined benefit pensions. Employees and taxpayers should have a clear honest look at what their compensation and OPEB are going to be and taxpayers should have a clear view of the actual cost of services. If the taxpayers aren't willing to pay for services then cut them. Don't promise benefits to employees without paying for it upfront. Don't expect our grandchildren to pay for promises made in 2014 in 2044.

Comment #9 by Redd Ratt on 2014 04 08

Rhode Island lost over $1 billion dollars of personal income from 2000 to 2010.

People who pay taxes are leaving the State. As RI's population actually went up somewhat over the same time period the message is that tax positive earners are leaving and being replaced by tax negative takers.

You can't tax someone who doesn't live here anymore though I'm sure the unions would like to do that to everyone who isn't a member.

Comment #10 by Jim D on 2014 04 08

Redd you are on target. Jim D it is amazing we lost ground in personal income over a ten year period. Thats not good.

Comment #11 by michael riley on 2014 04 08

http://taxfoundation.org/sites/taxfoundation.org/files/docs/Migration-AGI-(large).png

Comment #12 by Jim D on 2014 04 08




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