Riley: RI Pension Study Commission Boondoggle

Tuesday, January 20, 2015

Michael G. Riley, GoLocalProv MINDSETTER™

The Rhode Island Municipal Pension Study Commission lasted 3 years and has produced virtually nothing. Last week a Providence Journal headline read “RI Municipalities owe $5.1 billion in retirement, health benefits, report says."

The commission was an outgrowth of the 2011 State Retirement reform and RIRSA. Those reforms only affected the State and State pension plans. Cities and towns reforms were thought to be very messy legally compared to the State reform. It required changes to be negotiated through collective bargaining and then a series of changes in ordinances at the Town level. As far as the numbers headlining the Journal article. My analysis shows the City and town liabilities to be much higher than this report from the commission and higher than the State of Rhode Island’s liabilities. The Commission was in stall mode from day one. I have consistently criticized the hand-holding non-confrontational approach of this commission in dealing with Towns who have virtually no fear of reprisal for them discretionarily deciding not to fund what they have promised.

Who Should Pay?

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The argument over hot to reduce pension liability at the municipal level has been “who should pay?” and “who was at fault?” But underlying this discussion is the general belief, held by most elected officials, citizens/Voters just don’t care. Until they are hit with a big bill or hardship continuing apathy is very likely and the path of least resistance would just move forward with each individual town pension plan “making up” return assumptions and hiring their favorite actuary. Then it’s a matter of time before first pensioner in a town plan doesn’t get his check. At that point the town will officially be bankrupt. Since the town won’t have any money the retirees will sue and normally the municipality’s outstanding bonds would collapse but Rhode Island passed a law in 2011 saying Bond Holders have first lien on tax dollars. So instead of bondholders taking a hit, it will be the retirees and the taxpayers fighting each other. The elected officials will absolutely look for a State Bailout which means all state taxpayers will be bailing out the worst financial behavior in town’s tike Providence or Johnston.

Going back to the questions “who should pay?” and “who was at fault?” It’s obvious to me that each municipalities elected leaders were at fault and that each town should fix their own problem. The incentives however are producing the opposite of individual responsibility. Incentives now lead the worst towns to continue behaving badly and pray for a bailout that will come from other communities and their state taxpayer dollars. This has already happened in Central Falls as the General Assembly has restored Central Falls workers to 75% of expected compensation using state tax dollars. This decision to bailout was made even after a bankruptcy decision that cut benefits to 55%. This very unwise combination of laws passed by the general assembly has shifted the risk from Providence taxpayers to the rest of us.

What’s fair?

Does the General Assembly think it’s right for a volunteer fireman and family in South Kingston to be taxed hard in order to bail out Johnston Firefighters $100,000 per year retirements? Under the current set up this is exactly what will happen. If it does, I think this could create social chaos. I have suggested that the burden should be on the taxpayers who elected the officials who mislead/misbehaved and who benefited from kicking the can to their children. For example , I have Proposed that the very progressive City of Providence handle its mess by putting their money where their mouth is and creating a “wealth tax “ on the top 1% to pay for pension and opeb liabilities that total over $3 billion.

General Assembly

When the general assembly takes up this recent report from the Pension Study Commission and holds hearings legislators will need to address these issues they have created. If they do not and instead simply just form an oversight committee, as is the current plan .the outcome is easy to predict. Providence and 6 other towns will go bankrupt and the rest of us will pay for it.

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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.

Riley: RI Pension Study Commission Boondoggle

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