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Riley: Cranston and Mayor Fung Play the Hand that was Dealt

Tuesday, April 22, 2014

 

Cranston, Rhode Island has been identified as one of the worst-funded cities in America regarding pensions.

Like many other towns in Rhode Island, for some reason, the town wanted to manage their own defined benefit pension plan for police, fire, schools and municipal employees.

Like most towns that decided to do this, it has been a roller coaster.

Cranston now has five pension funds it contributes to. The most notorious is the Fire and Police plan known as PFERS. As of last June 2013, this fund was in serious trouble at only 20 percent funded -- making that fund, even worse than Providence.

Cranston owes $800 million less than Providence

However, they owe in retirement pensions, more than $800 million dollars less than Providence does to its to retirees. Further, Cranston OPEB liability is more than $1 billion less than Providence‘s Unfunded Health Care liability of $ 1.2 billion. Cranston has a population of 80,000 people and a per capita income of over $ 28,000. Most national pension surveys look only at the State capitals or towns of significant population when measuring pension debt. So Cranston sits “below the radar” as do West Warwick, Coventry, Woonsocket, Pawtucket et al. That is no comfort to the citizens of those towns who stand to be taxed massively in order to balance the lack of funding with the looming liabilities.

According to the Cranston CAFR 2013, the PFERS plan had assets totaling $58.6 and Accrued Actuarial Liabilities totaling $290 million. This was the result of changing assumptions to 7.5% discount rate it assumed no COLA and used a level dollar amortization of this closed plan for the next 21 years.

Discount rate too high

One obvious problem is the 7.5 percent discount rate is way too high. Only a fully funded pension plan could argue a discount rate of 7.5 percent under GASB 68 and Cranston will next year be forced to use a rate between 5 and 6% percent given its lack of funding.

Moody’s will use between 3 and 6 percent when evaluating the health of this plan in developing their credit ratings. The pension and OPEB liabilities will be weighted at 20 percent or double prior years weightings.

As a result of changing the discount rate to 6 percent, the Cranston Liability in the PFERS system soars to $388 million or an increase of $98 million in unfunded liability.

Additionally the asset valuation summary gives me pause and includes a calculation that reminds me of the misleading statements made by the City of Providence and Mayor Angel Taveras regarding the actual assets held for funding in the pension plan.

Two calculations

Cranston makes two calculations, one that includes discounting future contributions and another that calculates the assets without this forward contribution calculation. Fortunately Cranston uses the lower and much more accurate picture of assets , by dropping the discounted contributions. The discounted forward contributions would have added $ 23 million to the stated assets in PFERS.

Providence was told that this “discounting of future contribution” was a questionable practice, and that should end now by their Actuary Segal. To date, this highly questionable attempt to misstate assets has only been used by Providence. No other city in the country that I have examined has attempted this. Since Cranston calculated this strange number but did not report their assets as such, it is unclear why Cranston has disclosed this number.

PFERS pension funding problem has existed for some time now. Records show that In 2003, unfunded liability in this plan at over $200 million with only $18 million in assets (See chart on page 103).

Liabilities grew

From 2003-2012 liabilities grew from $218 million to $343 million. While assets grew from $18 million to $53 million. This is exactly what will happen again if going forward the plan fails to achieve 7.5 percent compounded for the next 21 years. As the new GASB rules are put in place Cranston‘s ARC will increase significantly putting further strain on all other municipal spending and probably will require property tax increases. I see no warnings about this upcoming crunch from Mayor Fung or the Council but they all know its coming soon, just like Mayor Taveras.

Cranston is much more forth coming in its clarity but the situation is not good and the amount of pension obligation alone, discounted at 6 percent is $310 million, thus far exceeds the 3 percent debt limit on Cranston’s $6.7 billion in assessable property. At some point this “pension obligation” will be just as important as the $72 million in bonded debt currently outstanding. RI state law has set 3 percent or approximately $200 million as the limit on borrowing for the municipality of Cranston.

Cranston does not appear to be a candidate for either Pension bond issuance or a Budget Commission. Cranston also has effectively closed all its defined benefit plans and as such has reduced exposure to new hires being added. All other employees are in DC plans or in the State hybrid systems of ERS or MERS. Cranston will very likely have to raise taxes and cut services over the next few years, as will many other cities but this Mayor and council has dealt pretty well with the cards they have been dealt and the Mayor has been one of the most valuable members of the RI State Pension Commission.

More on Cranston next week and how did PFERS huge liabilities ever happen in the first place? 

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: Timeline - Rhode Island Pension Reform

GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform. 

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2005-2010

In the five years before Raimondo was elected, pension changes included a decrease in established retirement age from 65 to 62, increased eligibility to retire, and modified COLA adjustments.
 
Read the Senate Fiscal Office's Brief here.
 
(Photo: 401(k) 2013, Flickr)
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January 2009

Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:

1. An established minimum retirment age of 59 for all state and municipal employees.

2. Elimination of cost-of-living increases.

3. Conversion of new hires into a 401(k) style plan.

 

See WPRI's coverage of Carcieri's proposal here.

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2009

Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions. 

 

Read the NCSL report here

(Photo: FutUndBeidl, Flickr)

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2010

Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.

"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo

 

Check out Wall Street Journal's coverage here.

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November 2010

Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot. 

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April 2011

Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.

Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.

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May 2011

Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.

"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)

 

Read GoLocalProv's analysis of the report here.

Read the Truth in Numbers report here

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October 2011

Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.

“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee

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October 2011

Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.

“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)

Read more from the firefighters' battle with Raimondo here.

Check out the New York Times' take on RI's  pension crisis here.

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November 17, 2011

The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.

 

Read more from GoLocalProv here.

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November 18, 2011

Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.

 

Read about how Rhode Islanders react to RIRSA here.

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January 2012

Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms.  The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.

 

Read about the pension workshop here.

Read Raimondo's feature in Institutional Investor here

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March - April 2012

Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.

“The present law is sound fiscal policy and should remain unchanged.” -George Nee (Rhode Island AFL-CIO President)
 
 
See WPRI's coverage of Chafee's attempt to cut pension fund deposits here.
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December 5, 2012

Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package.  In response, Chafee issues a statement supporting the negotiations.

 

Read more about Raimondo's opposition here.

Read about Chafee's statement http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here

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March 2013

Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.

 

Read about Raimondo's discussion of distressed municipalities here

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April 2013

The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.

"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)

 

Read GoLocalProv's coverage of the State Pension Fund's losses here

Read Ted Seidle's criticism of Raimondo in Forbes.

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June 2013

Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.

 

Read GoLocalProv's investigation into the rising pension costs here.

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September 2013

Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform. 

Read Taibbi's article in Rolling Stone.

Read GoLocalProv's response to Taibbi here.

Prev Next

October 2013

As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.

 

Read more from GoLocalProv about the players in the pension battle here.

 
 

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