Michael Riley: The Pension Study Commission Needs To Face Reality

Tuesday, February 18, 2014

Michael G. Riley, GoLocalProv MINDSETTER™

There is a great deal of media buzz surrounding Friday’s press conference, considering the settlement amounts to just a little over $240 million. Friday’s announced state settlement cost taxpayers an average of $609 per household. Rhode Island leaders and taxpayers should quickly move on and focus their efforts on the real crisis: the avalanche of debt immediately ahead for cities and towns.

For many taxpayers in Rhode Island, the $609 per household is relatively insignificant. Compare that $609 to the predicament of Providence citizens, for example, who face an increase of over $8,229 per household in the next year in pension liability alone. This is real and will be evident once Moody’s adjusts Mayor Taveras fantasy numbers to reality. Even Providence‘s city-hired auditor points out that $57.3 million in inappropriate assets were claimed in the pension plan. The actuary points this out in Section 1, points 2 and 3 … “We recommend future valuation of plan assets exclude discounted contributions from reported assets. “ Ouch.

Whoops, the auditor just said planned assets were overstated by $57.3 million. No one in the mainstream media apparently reads these reports or does real analysis. Where was Politifact? Taveras hopes and expects the rest of the RI media to just ignore this adjustment, as well as the pending proper liability adjustment of an increased $506 million and total unfunded liability of $1.338 billion (which will be published and verified after this November 2014 elections). He obviously intends to mislead citizens until the inevitable reality hits.

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In hot water

There are basically two RI government jurisdictions providing public sector employment. Citizens are taxed at both the state level and at the local level to pay the wages and benefits of public employees. Several towns have merged their local pension plans into the state system and so on Friday, it appears that the hike in liability to those taxpayers in merged towns will be constrained to the agreed upon cost.

However, many cities and towns still run their own local Defined Benefit Pension Plans and those taxpayers are vulnerable to much higher liability. The 17 “critical status” towns alone owe more than $2.2 billion in pension debt. In addition, nearly every city and town carries an OPEB liability, which is basically the unfunded liability due to health care benefits and other benefits. Town leaders bargained future health care coverage for public employees, yet never funded the obligation. These OPEB liabilities totaled $3.56 billion according to a report issued by the RI State Auditor General Dennis Hoyle (a pension commission member).

State settlement insignificant relative to local debt issues

Several other towns in Rhode Island have the same issue as Providence (while not of the same magnitude). They are large and the increases in liability that will appear due to more accurate accounting will dwarf the cost per household of this highly hyped state settlement. Comparatively, the state settlement is literally a drop in the bucket. I have not yet heard a plan for the cities and towns from the gubernatorial candidates. So far, of all the candidates, Mayor Fung seems most concerned about the local issue and has criticized the lack of focus for years now. Ms. Raimondo dropped the city and town fixes in her legislative effort because it was too hard to address.

So what are Providence, Pawtucket, West Warwick, Coventry, Cranston, etc. supposed to do? Are they on their own? Is the Pension Study Commission, now years old, supposed to do anything other than collect data? Does anyone think that the taxpayers in Central Coventry Fire District care more about the $609, or the $30,000+ per household the recent CCFD liquidation reportedly represents?

A looming $30,000 liability will crush local real estate prices, producing a downward spiral in assessment and tax collection. This dynamic is known as the “Detroit syndrome”. Citizens should try to avoid being trapped in this spiral at all costs, but this contagion is just around the corner, and Moody’s will judge all towns more harshly. It begins soon by lowering the discount rates, which are arbitrarily chosen by each town (Providence’s is 8.25%) to a standard 6% so we can compare towns across the United States. Additionally, Moody's has declared that they are doubling the weighing of pension and OPEB under-funding in municipal rating decisions. If a local pension fund is deeply underfunded, then those towns can expect an even lower discount rate—perhaps as low as 4%. Rhode Island stands out like a sore thumb compared to all other localities across the country in the number of local pension plans under 50% funded.

In short, we have a real crisis that may not have 14 more months of “analysis and negotiation“ before this situation spins completely out of control. Which leaders will address this? When can we get a “real” pension commission? Has Chafee now finished and will he defend his 38 Studios actions for the rest of the term, or can he actually pitch in and work to help this crisis? Why doesn’t he involve himself in Coventry, or West Warwick? How about a commission that at least standardizes discount rates and adheres to rating agencies’ reality? Are they really saying Providence is fine at $8.25%? Is it too much to ask for a single metric? All we ask is that the commission tell us the truth and their plans to fix it.

 

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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