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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.


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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Listen, the alarm was sounded by Gina Raimondo, a democrat. Now, she's the enemy of the public sector unions. She stole from them, she "cooked the books". If a DEMOCRAT can't light a fire under our "leaders", I seriously doubt a republican can.

Comment #1 by David Beagle on 2014 03 04

Forget it! There are more takers than makers in Rhode Island.

Comment #2 by John Ward on 2014 03 04

Unfortunately Mr Ward we cant just forget it.

As Providence melts down it will become more clear that its the entire states tax payers that will be bailing the city out. So people in Hopkington are going to pay for current continued inaction in Providence ,West Warwick and Coventry. "Spread the pain", and "for the greater good" will be the watchwords.Let your legislator know, right now, that you refuse to bail out any other town that has mismanaged its local pension and OPEB plans. That debt belongs to the indebted towns and its taxpayers,plan members and should also belong to unsecured bondholders.
I am aware of the law passed just prior to Central Falls receivership. I expect that union lawyers may regroup to challenge the legislation that placed bondholders ahead of retirees. I dont think the action would violate the proposed settlement.

Comment #3 by michael riley on 2014 03 04

Time to accept the facts. RI legislators are in the pockets of the public unions, and no serious pension reform will happen. As a result, many cities in RI will be bankrupt in a few years. Even then, the legistlators won't allow harm to the unions and will shift costs to the taxpayers by raising everyone's property taxes several thousand dollars per year. As a result, many thousands of RI taxpayers will leave the state, businesses will leave, property values will plunge...and the unions will crow that "they won." In 10 years RI will be one large wasteland of abandoned property will (still) the highest unemployment rate in the USA.

Comment #4 by Katy Sloop on 2014 03 04

Decoupling the public unions from gov't is the only way to save this state. either via Act 10, right to work or a positive outcome in the Harris vs. Quinn case now in the Supreme Court.

Comment #5 by Odd Job on 2014 03 04

Warren Buffett is interested in making money for himself and his investors and he is undenialably good at it. Of course he doesn't like public pensions. Every dollar spent on public pensions is a dollar he can't capitalize on. That's all this is about. Providence seems to have had enough money to give Raimondo a real sweetheart deal on Point Judith -- what about 20 to 24% off the top the first year. Incidentally, since we're quoting Buffett, he is also against hedge funds big time. I believe he has put up a $1 million in a bet regarding the poor performance of hedge funds.

Comment #6 by Fruma Efreom on 2014 03 04

Fruma is right, the pension system's in this state are as solid as a block of granite, EVERYONE else is wrong.

Comment #7 by David Beagle on 2014 03 04

To all you labor haters out there pinning your homes on Harris v. Quinn as a way to get rid of public sector unions (odd job). you should do a little research before you get yourself excited. H v. Q is a very narrowly structured argument which concerns weather home care workers are actually state employees and thus able to be compelled to join a union. Abood v. detroit from the 1970's codified into law that the state (or municipality) could compel their employees to submit to a central bargaining unit (a union) in order to preserve labor peace and to prevent "free riding" of employees not choosing to join said union. Harris v. quinn's main argument against state imposition of collective bargaining is that the home care workers are not hired/ fired or trained by the state and thus they cannot be compelled into collective bargaining under abood v detroit. So even a win for Ms. Harris would only apply to workers in a "home care" type situation and would not have effect on "state" employees otherwise. Although this will have a profound effect on the home care workers here in RI who have recently gained the right to unionize.

Comment #8 by alan gouveia on 2014 03 04

The State cannot declare bankruptcy but they can find that they are insolvent.

This will become the 1st Detroit State.

People that actually pay more in taxes than they receive from tax payers are the only thing holding this together. RI lost $1 billion in personal income from 2000 to 2010 yet the population went up slightly.

This will likely double or triple from 2010 to 2020.

Comment #9 by Jim D on 2014 03 04

Mr. Riley:

Warren Buffett is correct in many things. Looking at Narragansett, which has ignored their pension and OPEB commitments for more than a decade just got a rating upgrade from AA- to AA! How do you reconcile the creative books in Narragansett to the funding problems? Would there have been drastic ARCs now if the funding had been made during the boom years, the depression, and now the recovery? How can bond raters reward such irresponsible behavior? Is there any more assurance to any potential bond holder if they Town will not honor their commitments already in place? Yes, there need to be changes and some have been made, but elderly employees should not be targeted for the Town's politicians shortchanging them and taxpayers alike. The Town knew the actuarial cost of each contract benefit when they were negotiated. So there is only one place for the blame to fall.

Comment #10 by Gansett Proud on 2014 03 05

No there is blame in many places including insiders milking public pensions ("buying" years or getting sudden promotions in the last few years to build up pensions) some unions cynically getting 6% "colas" they must have known could not be sustained in exchange for political support (wasn't it with Cianci?) but it also includes politicians who when a funding crisis hit failed to make proper payments rather than raise the revenue or cut expenses, and the public who expresses support for putting off the day of reckoning by re-electing these politicians; and the corporate world too learning so well how to game the system by blackmailing states (e.g Fidelity, CVS, film companies...) into tax evasion as do the rich (which is why we don't have sales or excise taxes on yachts or private planes but we do on cars and bicycles) all of which reduces the ability of all states to fund their programs.

That said, I think we should all have some sympathy for rank and file pensioners facing reduced living standads, taxpayers facing higher taxes or reduced services, and even current politicians who have to deal with the situation they inherited.

Solutions will almost surely have to involve some sacrfice from pensioners, taxpayers, and those wanting government programs (including students, developmentaly disabled, motorists, developers, those on or who work with medicaid...)

Comment #11 by barry schiller on 2014 03 05

This state imports crime and poverty..that's the Democrats cash crop,and that's why the state and taxpayers suffer.We don't attract business, we attract welfare and all the burdens associated with this state's massive entitlement programs.Rhode Island is stuck in a blue progressive cesspool of socialism..until this state turns red we will for ever be this country's poverty poster child.

Comment #12 by LENNY BRUCE on 2014 03 05

Barry Shiller has it right.Pain will be shared . In municipal pensions as opposed to the state system, the causes vary from town to town and each plan or town has a different economic profile. Narragansett, for example, gave away the store, yet held down tax rates and ignored funding warnings...that was pure political mismanagement and /or corruption...tax payers should and will pay heavily.I estimate the debt at over $20,000 per household. In Providence taxpayers are at the limit with the highest commercial taxes in the Country and distorted high residential taxes ..there is really no where else to go so, expect reduced services and the public employees will take a huge hit and taxpayers might discover new taxes in Providence. Some already on the drawing board include a "city" sales tax or "wealth tax". These "ideas" should appear soon(see Deblasio).

Comment #13 by michael riley on 2014 03 06

Mr. Riley:

How do you reconcile the higher bond rating for Narragansett in light of the actions of past and present administrations and Town Councils there. There were times the Finance Director received awards for their keeping of the books. Perhaps they were from the Food Network since they were cooking the books so well. What do you think the Town should do with their retirees who paid every cent required while the Town hid the real truth from everyone. Do you penalize retirees with no COLA in their 80's by taking away their healthcare? Everyone points to the COLA, but only about half of Narragansett retirees get one. Meanwhile the Town only has negotiated concessions from two of five unions.

Comment #14 by Gansett Proud on 2014 03 06

Gansett Proud
The towns bond rating is high because it has the ability to tax. based on our assessed value of real estate ratings agencies think taxpayers can handle any increases in interest payments due issued General Obligation debt, Not every town is so lucky. In Narragansett the problem is elected and unelected officials like the Town Manager and Finance Directors gave away the store. the town coucils then approved and regularly negotiated contracts with unions that couldnt or wouldn't be funded. It was all wink wink nod nod. Any one who questioned it was told"don't worry about it" I have watched very closely the last 10 years in Narragansett . I have engaged and participated in lengthy attempts to change things.
Basically the entire town is in denial. Citizens think they can elect incompetent or semi-competent people to manage town affairs and their finances. Financial literacy is a huge issue and its caused great damage. second the people trusted that if the elected officials thought there were problems they would speak up. this turned out not to be true. In fact when I exposed issues, documents were withheld or slow in coming. Third Unions fought against disclosure of basic funding problems and regularly destroyed officials in negotiations.
So the the town did hide the truth and encouraged sloppy accounting.Town officials lied about funding the pension plan. Is that illegal? Should be. So yes in the case of Narragansett and anyone else in Rhode Island over 80 i would not touch them, period. Every one of the towns generous benefits has to end or be reduced for new hires. Some unions went 20 years without health care co pays and today pay less than 2%. That is just greed on unions part and stupidity of officials . If i were arbiter ,I would end the defined benefit plans because Narragansett has shown no ability to manage one or fund them. I would issue a supplemental tax of $36 million (20 for pension and 16 for OPEB) to all Narragansett homeowners and business owners for 2015. This is roughly a 75% increase from last year and only party pays down the problem.For any employee or retiree who is under 70 years old and earns more than $50,000 per year,I would end all colas until town is 80% funded I would make all retirees and active employees join medicare at 65 and make all health care copays 30%.

But I am not arbiter. So at this point ,Narragansett needs a referee and a reset.They need an adult in the room. Right now they are trying to figure out if they actually have to do what they said they would do in writing to the pension commission. They said they would pay $5 million toward the Pension ARC .Well Narragansett council lied , they wont pay .They haven t put one penny in the pension plan for 13 years. And Revenue Director Booth Gallogly will let them slide because this is a fake municipal pension commission. Five or six different towns have filed plans they have no intention of keeping.They are not meeting or negotiating. Its a farce. This commission is trying to get through the year and then dissolve and re configure itself under the next Governor. Someone with more integrity than Lincoln Chafee who this commission reports to.

Comment #15 by michael riley on 2014 03 06

i dont know where to start with you.

Comment #16 by michael riley on 2014 03 06

Mr. Riley: Some excellent points about our Town! I would support such a plan, but as you know it will be DOA. Especially, in light of the 3rd rail issue this fall, the "new" athletic field complex bond issue. It is almost like the better bond rating was orchestrated to get this new bond issue passed. Your name even came up at the last Council meeting by Mr. Vandermersch, but the Council basically ignored what he had to say. At the same time, the Town doesn't want to pay their contracted obligations to their retirees and current employees as the "plan" stated to the State. There is a lot of spin from Ms. Nolan, but no action. The State Commission seems to have moved on to look at OPEB issues while ignoring their main mission. They have briefly played footsies with Coventry limiting Mr. Hoover to public comment.

Comment #17 by Gansett Proud on 2014 03 06


Comment #18 by LENNY BRUCE on 2014 07 08

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