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Michael Riley: The Harsh Reality of the Pension and OPEB Crisis

Tuesday, February 25, 2014


The party is over for spending without funding, believes Michael Riley.

Right now your city administrator or mayor is sitting with the finance director and making decisions about next year’s budget. But this year, thanks in part to pension reform and the municipal study pension commission, close to 14 different town administrators and directors will have to finally reveal the truth and make real decisions about pension funding and cuts to other programs.

During this year’s budgeting process, many of your town’s municipal departments will hear a lot about constraints due to “ARC” payments. Town employees will be confronted with budget cuts and perhaps wage freezes. New priorities will be established and marginal expenditures will be eliminated. The party is over for spending without funding.

Corruption in RI’s cities and towns

The hard reality is that Mayors and councils have been, for years, knowingly sweeping huge obligations under the rug because there were no penalties them for doing so. Sure it was extremely irresponsible and completely against State Law, but so what? Officials had bigger fish to fry. Narragansett for example has violated Section 45-10-15 of the Rhode Island General Laws by not contributing 100% of the annual required contribution (ARC), every single year since 2001. Every Rhode Island municipality has known this since at least 2006.

The penalty for violating this law was for the town to fill out a form “ stating a new plan” and describing planned fixes. Laughably, towns could then easily violate this law without risk to their jobs and so they did so with impunity. Narragansett went from a $9 million problem in 2006 to a $120 million dollar liability when OPEB was included in February 2014. How could such a wealthy town, with it’s self touted “low tax rates” have set off this horrible time bomb? Who was watching the store?

Like Narragansett, other towns also operate in an environment heavily exposed to corruption. Such towns are allowing the very same people responsible for negotiating wage and bargaining agreements with the same unions who the managers have systemically underfunded and can never pay. Often the same town manager or finance director, who gave away future benefits and swept them under the rug, also negotiated raises to the same unions and raised benefits again.

Ignoring the problem

In Narragansett, Councils and financial managers—through agreements—spent years not even charging a co pay for health insurance. But as long as taxpayers didn’t get hit directly in the wallet, then everything was fine. Both sides occasionally colluded, management and the unions and towns refused to fix the problem. In 2006 a frustrated Town Council passed an ordinance that injected $1 million into the under-funded town pension plan. Local activists and concerned union members convinced council members that the plan’s unfunded condition was a real problem. The council passed the ordinance 5-0. However, no money was ever put into the plan. The town manager simply ignored the unanimously passed ordinance and the plan has continued to operate like a pay as you go plan since 2002. The Narragansett council then fell under pressure from the bad publicity and fired that town manager.

Narragansett is currently on its 4th town manager since 2008—with each manager saying pension funding was a priority. Narragansett, once 100% funded in the late 1990s, is now in critical status and has finally proposed real reform to the pension study commission. The question now, as before, is what if they do not follow the ordinance that they passed? Is there a penalty? Do they view the Pension Commission as having any power? Is the whole Commission a toothless sham? Why hasn’t West Warwick ever issued a specific plan? What will happen if they don’t?

We have all seen the King of “consensus and Can-kicking “ Lincoln Chafee throughout his career, so tt’s hard to believe that this pension commission, which reports to the Governor, will do anything but run out the string in 2014. Towns will deteriorate in the meantime especially if we have difficult financial markets .So reality may hit sometime later, with actual vendor complaints about city payments or delayed checks to workers or IOU’s such as was seen in California. Unlike Providence, Narragansett has plenty of room to tax citizens, but is that the right solution? My blog, rishrugs.com, shows a single page from the Narragansett Finance Committee power point presentation in 2012. It describes just one worker in Narragansett and the town’s cost and obligation to that one worker.

The media coverage

Now just one word about RI media: Troubling. Even the part of the media that claims to focus on pensions, has delivered both good data and bad data. This is sometimes accompanied by good analysis and often bad analysis. One outlet has an interactive map, which shows Narragansett’s pension Liability as a little over $1 million. This map has been up on their site for a month. I told everyone it was using wrong numbers. Narragansett’s own actuary (that people should know by now to question) shows $42 million in Unfunded Pension Liability. I show much more than $42 million using Moody ‘s and GASB metrics. Either way $1 million is just a huge mistake.

Where do we go from here?

My goal, in addressing the pension and OPEB crisis, is to inform and to enlighten. My hope is that voters will reject those elected leaders who have acted without integrity to harm the very same communities they represent. If those officials are not part of the solution, then they are part of the problem. There is an election approaching in November 2014. It would be appropriate to ask candidates what they have done about the pension issue in their towns specifically. If they are in a critical status town, like Narragansett, ask them what do they intend to do?

Most towns have come to realize the benefits they have given away are enormous and unsustainable. Taxpayers should speak up and tell the elected few that this game is over. Unions, elected officials, and a taxpayer representative should sit down and agree on a plan because the Pension Study Commission is probably out of business for the next 8 months.

Each town has to look at revenues and whether benefits are too high. Here is a sample of just one employee in Narragansett. Look at his/her contribution versus the compensations. Tell me why we can’t adjust this.
















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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