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Michael Riley: State Pension Fix in Limbo as Municipal Debt Grows

Tuesday, April 29, 2014


Unfortunately, I could not attend Monday’s RI Local and OPEB Study Commission meeting but I have read the agenda and after last month's disappointing meeting I think the commission owes the public some clear explanation about what exactly has been accomplished so far and what the goal of this commission is. In the three weeks since the last pension meeting, the circus in Coventry has added a new twist as the Central Coventry Fire District is now in limbo. The outcome has an obvious impact on Coventry as a whole. However, the revenue director and commission have been oblivious to this long developing nightmare and should have intervened in Coventry over a year ago. So now, the Central Coventry fire district is being liquidated or is it?

The Assembly Strikes Back?

The general assembly appears to be overwhelmingly interested in allowing all fire districts in Rhode Island to be under the jurisdiction of the revenue director, if in “critical status” and presumably the pension study commission as prescribed by the Fiscal Stability Act. It is inconceivable that the state would intervene only in the fire district without taking into account the very vulnerable financial condition of the entire town of Coventry. The assembly acted after watching several votes of the people and a judge ordered liquidation. They suddenly decided that Judge Stern’s ruling and the people of the fire districts’ vote was not relevant and attempted to retroactively define the fire district under the Fiscal stability Act. This assembly effort may indicate that the worsening relationship between the General Assembly and the judiciary is coming to a boil. The assembly, after passing Pension reform in 2011 was clearly miffed at Governor Chafee’s yearlong meddling and efforts to use Judge Carter-Taft “court ordered mediation” to help out his friends in the public sector unions. After a year of negotiations, the mediation has ended in disaster proving that it’s never too late for this Governor to screw up a deal.

What about the “year of Cities and Towns”

Now that taxpayers and unions are going to court over an already passed law it is important to be aware that Mr. Chafee is not done destroying this state. In late 2011 Mr. Chafee became extremely concerned about the financial condition of cities and towns especially the Pension issues. He declared that 2012 would be the “Year of Cities and Towns”. The key tool for addressing municipal pension debt and OPEB liabilities became the Rhode Island Pension Study Commission headed by his direct report Revenue Director Rosemary Beth Gallogly. The commission’s effort matches the dithering, wandering personality of the Governor. After more than two years this commission cannot even tell us how well each City and Town has done relative to the Funding Improvement plans issued over a year ago. The revenue director, has outside the commission, produced news puff pieces claiming two towns specifically, West Warwick and Narragansett have complied with the Funding Improvement Plans (FIP) they submitted a year ago. Yet there is no evidence of this and at the last Pension Study Commission meeting none was presented. I have directly asked the Town of Narragansett for evidence and they will not even return an email. West Warwick FIP filing highlights from 15 months ago appear below:

So one obvious function of the Commission is to report on progress. Ms Gallogly claimed in public that West Warwick and Narragansett had achieved success and she was proud of the cooperation. We can see how they did if someone publishes the data. The commission should review the progress, if any, versus the FIP. We can then check off all the items they agreed to accomplish and identify those that they said they would do but failed. Let’s make them accountable. The process of comparing the Funding Improvement Plans to actual progress and reporting to the citizens of this State should have taken place months ago. The fact is , on April 28 , 2014 , more than 2 years after this commission was formed we still have no idea about the progress of these “critical status” towns and further there is no indication as to a plan for the future. What happens if the town ignores the commission and ignores their own submitted plans? Will this be like the General Auditor attempts for compliance? Will elected officials just violate commission edicts as they please?

The Pension Study Commission has failed to produce any progress of note and instead impedes progress by allowing town officials to stall and commission members to use their appointments as political platforms. The Chafee appointed Union members have to be absolutely thrilled with this commission and Mr. Chafee’s latest debacle.

The only path to avoid multiple bankruptcies involves receivership and that is up to Director Rosemary Beth Gallogly and she doesn’t have Governors support or the intestinal fortitude to do what’s right to save this state.


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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