Riley: RI Ignoring The Financial Disaster Staring It In The Face
Tuesday, March 04, 2014
"BUFFETT: Here Comes 'A Lot Of Bad News' About Public Pensions"
This weekend, two very interesting and relevant stories have emerged in the national media. No doubt Rhode Island’s media will largely ignore it, even though its citizens are staring disaster in the face. The first headline appears above as the most famous investor in the world took time in the most widely read financial report in history to opine about Public Pensions in the United States. It takes a lot for Warren to fit something like this in his annual report and we can assume he understands the math. So we feel justified in our concerns and the focus of this column. His report appears here:
“Local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford. Citizens and public officials typically under-appreciated the gigantic financial tapeworm that was born when promises were made that conflicted with a willingness to fund them. Unfortunately, pension mathematics today remains a mystery to most Americans.
Investment policies, as well, play an important role in these problems. In 1975, I wrote a memo to Katharine Graham, then chairman of The Washington Post Company, about the pitfalls of pension promises and the importance of investment policy. That memo is reproduced on pages 118 - 136.
During the next decade, you will read a lot of news – bad news – about public pension plans. I hope my memo is helpful to you in understanding the necessity for prompt remedial action where problems exist.“
Mr. Buffett is clearly sounding the alarm. His message is crystal clear. So what is the reaction of the Mayor of the worst funded City in America (see Chart)? Mayor Angel Taveras apparently doesn’t see the same issues. After modest reforms in2013 and which ignored the advice of his own current and former State Auditor Generals, Mayor Taveras recently said:
“I am very proud of the work we have accomplished to address Providence’s Category 5 fiscal hurricane and put our city on firm financial ground,” Taveras said. “Michael’s continued work as a contract consultant to the city will assure a seamless transition to new leadership in the mayor’s office as we prepare the fiscal year 2015 budget and continue our daily focus on moving Providence forward.”
Mr. D’Amico is yet another departure from this administration. So let’s get this right, there was a “category 5” 2 years ago and Taveras threatened bankruptcy. Since then he reduced the Pension liability largely by “negotiating” an end to 6% colas. Now we’re ok? It is arguable whether this is self delusion or political lies, neither is what we want in our leaders.
Aside from not recognizing reality, Taveras and his administration have engaged in accounting maneuvers that even their own auditor has disallowed and will reduce pension plan assets by nearly $60 million.
Also over the weekend this headline in the San Jose Mercury news:
"Pension reform: Settlement talks brewing in landmark San Jose case"
The battle over pensions in San Jose has been going on for years and California is on the front line, as is Illinois and tiny Rhode Island. Mayor Chuck Reed, Democrat, has become so concerned with the crowding out of municipal spending due to legacy costs of public employee pensions and health care, that he and several city leaders have backed aggressive reform.
San Jose Mayor Chuck Reed:
"There are important principles here," the mayor said, brushing aside the settlement plan. "We want to be able to control skyrocketing costs and it looks like we're going to have to get the California Supreme Court to tell us what the law is."
So what is the level of debt that has Mayor Reed so concerned? How does San Jose and its crisis compare to Providence and Mayor Taveras’ miracle fix? In order to make real comparisons I have adjusted San Jose and Providence to the afore mentioned Warren Buffett’s and Moody’s Analytics suggested discount rate of 6 percent The results appear in the chart below should be of concern to every Rhode Islander. Here are some highlights:
- Providence pension debt per household: $20,299
- San Jose pension Debt per household: $8,646
- Providence pension funded Ratio: 18.8%
- San Jose Funded Ratios: 65.3% and 47%
Top 25 cities Morningstar funded ratio: 76.0%
Mayor Reed has every right to be concerned as his San Jose pension plans are deeply underfunded and near “crossover points. He needs a mechanism for addressing out of control public employee costs. How can anyone say otherwise? Warren Buffett also sees a crisis developing nationwide. He is so concerned about the situation that he mentioned it in his 2013 annual report released 3 days ago. But our Mayor of our Capital City of Providence knows better than Warren Buffett and many Mayors and financial experts across the country.
Mayor Taveras has in his words “fixed” Providence and in his state of the city speech he made this remarkable comment on February 11:
“Some people have pointed to our retirement system’s 31.4-percent funded status and said we did not accomplish enough. Here is my response to them: History will judge us well.“
Many of us had hoped that Mayor Taveras had a “handle” on Providence‘s pension and OPEB issues and consequently the severe “crowding out” of all other municipal finances in Providence.
So Warren Buffett has rung the bell, mayor Taveras ignores it and there will be more nationwide analysis across America. Providence will soon again be a headliner as by far the worst funded in the Country of any major city with a taxpayer burden 5 times that of the top 25 cities in America which includes Detroit and Chicago.
It’s clear that Mr. Taveras not only denies reality, he has no plan or intention of going back to the drawing board. He has officially given up. So let us be thankful that a new Mayor is on the way. Let’s hope a new mayor focuses on Pension and OPEB. Let’s also hope Providence isn’t another Central Falls.
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.
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.
Current Cost of Pension Fund
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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