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Russell Moore: Raimondo, Taxpayers Win in Pension Settlement

Monday, February 17, 2014


Rhode Island's pension settlement puts General Treasurer and Democratic Gubernatorial candidate Gina Raimondo on solid ground going forward in the campaign.

There’s some serious irony behind the ultra-secret negotiations that led to the proposed settlement of the law suit challenging 2011’s historic pension reform.

First, it was a common assumption that the negotiators on behalf of the state, General Treasurer and Democratic Gubernatorial candidate Gina Raimondo and Governor Linocln Chafee, were agreeing to promises that they themselves couldn't guarantee. For instance, if the deal was deemed too lucrative by the state legislature, which passed the pension reform in the first place, legislative leaders could simply refuse to consider the proposal and kill it on the vine.

Will rank-and-file go along?

But given the parameters of the settlement unveiled last Thursday, it’s far more likely that we’ll see the rank-and-file union members defy their leadership and shoot the deal down.

That’s because the agreement maintains roughly 94 percent of all the savings that were contained in the original legislation. The unfunded liability of the pension system (meaning the amount of money that would be owed if everyone who is promised benefits today could demand them) will be slashed by almost $4 billion—and more than 40 percent—if all sides accept the proposal.

Due to some slight modifications, such as allowing the workers to retire at 65 instead of 67, and granting partial cost-of-living-allowances up front and on a 4-year basis, about 6 percent of the original legislation’s savings will be lost.

Huge win for taxpayers

But that seems like a tiny price to pay seeing that it insures the plan won’t be thrown out in court in its entirety. It’s easy to sit back and speculate that the state would likely prevail in the case, but here’s the dirty little secret: no one really knows what a judge would decide in the end. From a taxpayer’s standpoint, the agreement seems like a clear victory. Given those facts, this agreement looks like a slam dunk for the state legislature.

That’s the second biggest irony behind the developments of last week. A common assumption during the negotiations was that Raimondo and Chafee would cave under pressure and give the store back to the union negotiators. Clearly, that wasn’t the case.

That hasn’t stopped the right wing talking heads, who are never really happy with anything, from criticizing the deal. They’re claiming that the deal rescinds too much of the original savings and that the original pension reform didn’t go far enough in the first place. According to their logic, watering down an already imperfect plan is irrational.

I swear these people don’t have a pragmatic bone in their bodies. Politics is the art of the possible and compromise is essential to accomplish anything. If you want to see how government operates without comprise, take a look at the federal government as of the last few years.

It’s also amusing to note that we didn’t hear a peep from these same individuals when former Governor Donald Carcieri achieved “pension reforms” during his tenure on numerous occasions. None of his pension reforms even put a dent in the unfunded liability yet these same people never missed a chance to praise the former Governor.

Will unions reject it?

Given how attractive this deal is for the state and taxpayers, it’s a distinct possibility that the unions themselves will see the agreement as a clear defeat which will give them more of an incentive to reject it.

There has already been some clamoring by some retired state workers in the blogosphere and on social media to reject the agreement and head to the court room. But it remains to be seen whether those individuals represent the majority of the state workers. Let’s hope not or else we could become a state that does nothing but pay pensions.

In any event, the turn of events closes out the week in spectacular fashion for Raimondo. On numerous occasions, it looked like it was shaping up to be a bad week for Raimondo. She appeared indecisive when the press conference was cancelled only to be rescheduled for a few days later. If the deal that was announced would have seriously backslid on pension reform,

Raimondo would’ve lost the largest feather in her cap going forward.

Big win for Gina

Instead, by retaining so many concessions while removing the threat of losing them all, Raimondo looks like a strong leader once again—which in the end should buoy her campaign for Governor.

Expect Raimondo to compare her version of pension reform with that of Providence Mayor Angel Taveras throughout the course of the campaign. According to a recent report in Golocalprov.com by Stephen Beale, the Providence pension reforms reduced the city’s unfunded liability by roughly $133 million. Remember, Raimondo’s reforms, even with the current settlement proposal, reduce the state’s unfunded liability by $3.9 billion. That’s roughly 25 times the amount.

Taveras has gotten tons of press as some type of a reformer, but his reforms pale in comparison to what Raimondo proposed to the legislature, got them to adopt, and have now gotten union leaders to agree to.

Raimondo can also point out that she can sit down and hammer out an agreement by sitting down with all the interested parties and negotiate.

This puts Raimondo on solid ground going forward in the campaign.

She’ll be able to position herself as a socially liberal family woman with a common sense approach to finances. Given that she’s only 4 points behind in the latest Providence Journal/WPRI poll conducted by the highly respected Joe Fleming—coupled with her impressive $2.5 million campaign war chest, Raimondo will be a force to be reckoned with going forward.


A native Rhode Islander, Russell J. Moore is a graduate of Providence College and St. Raphael Academy. He worked as a news reporter for 7 years (2004-2010), 5 of which with The Warwick Beacon, focusing on government. He continues to keep a close eye on the inner workings of Rhode Islands state and local governments.


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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