Riley: Rhode Island Pension Fund Meltdown in Full Force
Tuesday, September 08, 2015
The State of Rhode Island pension fund shortfall over the last 14 months now exceeds $750 million dollars. At what point does the Governor or the Speaker of the House consider this a problem? Will it even affect their pet taxpayer funded projects like building 38 Stadium or borrowing a billion for tolls? When the Governor was Treasurer and running for Governor she emphasized the “math” that a hugely underfunded pension system would affect all borrowing and spending in Rhode Island. She persuaded many of us that if the liability was not addressed immediately, then Rhode Island was surely heading for economic disaster. Since that campaign began, the proposed reforms were whittled down to current law, early on the Municipal underfunding problem was thrown completely under the bus by Governor Raimondo as “too hard." Now the State Law has been twice challenged in Court and twice weakened in favor of Public Employee Unions. Today the Law and improved funding ratio from the depths of 2011 appears to have more to do with the significant re-Amortization that took place rather than the other substantial reforms. For State taxpayers there has been improvement in the average citizen’s exposure thanks to the reforms.
But there is still lots of risk and even more in Municipalities which are getting shellacked in this market without any plans to deal with the Issues. Providence Officials continue to lie and mislead municipal bondholders about the financial condition of Providence. Many cities and towns have had bankruptcy pushed off, not because of reform but because of a 5 year bull market in Stocks. Well that appears over. August declines were massive. We calculate that the State lost between 3 and 4% for the month on their investments. That shortfall of $300 million dollars added to the $450 million shortfall for the fiscal year just ended :totals $750 million in just 14 months. Again, this is just the State pension fund.
Budgeting
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTI don’t know the answer to this but do the various ongoing revenue and expense reviews given to finance committee members include the Status of Pension Underfunding? If for example the Stock Market closed the year down 15% and Interest rates actually rose at the same time. We calculate the State Pension Fund will lose an additional $700 million dollars totaling a shortfall of $1.45 billion over fiscal 2015 and fiscal 2016. Would this extra $1.45 billion in pension liability affect the Governor or Speakers budget or the contributions necessary to fund the Pension plans properly? It should. This is not phony debt. The debt is very real and accounting standards are making them real by bringing the pension liabilities right on to the balance sheet.
A not so unlikely sequence of events
Preparation is key to good government, Crisis management is a bad way to govern. Rhode Island has barely scraped by in the recent past with one time fixes like tobacco bonds and the shaky foundation of casino revenue to cover up really bad spending decisions and way too generous State and municipal employee benefits. The Structural deficit is huge right now even with or without an explosion in Pension liability.
Here’s my scenario..
- Stock markets continue to be unstable.
- Providence Finances are investigated and the city is forced into receivership.
- The cost to the State to bail out Providence will affect all matter of projects and current spending. Taxpayers all over the state will have large tax bills not only from Providence but from the reduced revenue in their own towns.
- Critical infrastructure works will come to a grinding halt.
- 38 Studios lack of investigation will continue to hamper any new borrowing or outside investment because we just don’t Trust Raimondo, Mattiello and Kilmartin. After all, why should we?
- With the whole country suffering from reduced budgets and spending and worsening Pension and OPEB funding, Providence and Rhode Island will become totally expendable. No white knights to save the day.
Do Raimondo and Mattiello have a plan B?
Have they even thought about the possibility of a recession and or Providence Bankruptcy? What will their priorities be? I am really concerned that there is no Plan B. While I am sometimes impressed with Raimondo’s moves to fix the Government Corruption and waste, that the last Governor claimed to fix, I do not have high hopes for Mr. Mattiello who shows little effort to address corruption. Fixing Providence before it melts down on all of us is the single best thing Mattiello or Raimondo can do right now. The Director of Revenue should move in tomorrow and shut it down. The last 15 years of numbers given to the director of revenue by Providence have been false. This year’s numbers are no exception. The pension fund status and the removal of $63 million in pension assets through a default from the city is a good place to start.
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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