Riley: The Odds That RI Pension Plan will be Fully Funded by 2040
Tuesday, March 15, 2016
This weekend on A Lively Experiment the question was asked, “Given that our pension asssets are virtually unchanged at $7.26 billion from 2011 when Raimondo took over, is there any reason to believe todays comment from the Treasurer’s Magaziner’s office that the fund will be fully funded in 25 years?"
So first the fund is solvent. But I emphatically stated there is little or no chance of ERSRII being fully funded in 25 years. From my perspective it’s just math. The discount rate assumption is simply too high and returns are too low and as a result the State is knowingly underfunding the pension plan thus shifting our current cost burden to the next generation.
A review of the facts shows the current unfunded pension liability is estimated at $5.65 billion dollars. It's calculated like this. The total actuarial amount owed is roughly $13 billion less the assets which are $7.26 billion. $13 billion is the present value of the already incurred liability discounted at 7.5%. The recent 2015 CAFR shows on page 127.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTPage 127 Shows the sensitivity to a change in actual returns. A 1% lower return assumption to 6.5% increases the PV liability by 25% or approximately $1.4 billion dollars. This would mean the state would need to contribute more now to fund existing liability going out 25 years.
State doesn’t want to put up adequate funds
The state is well aware that if return on assets falls shy of forecasts of 7.5% then more money must be contributed to the pension plan from the general revenues. That means less spending on current services or increased taxes to pay for prudent and critical pension funding. (Reminder: Rhode Island at 56% funded is in Critical Status)
So leaving aside the ridiculous cherry picked talking point from the RI Democratic Party Chai, let’s examine the justification for a 7.5% return assumption. From January 2011 when Raimondo took office until January 31, 2016, the fund has been composed and managed under Raimondo’s strategy. Treasurer Magaziner, despite talks of financial wizardry in his campaign, has made virtually no portfolio changes in the first year often saying how well the Raimondo strategy is working. The returns are a woeful 5.4% in the 5 years of the Raimondo portfolio. For the last 10 years the returns are 4.4%.
In addition to the fact that returns haven’t even come close to 7.5% the chances of achieving that return are virtually nil given the Zero Interest rate policy (ZIRP) that has now morphed to negative interest rates (NIRP) in much of the industrialized world. But I guess there are some really astute managers out there in the actuarial world still predicting returns of 7.5% or as in the case of Providence 8.25%.
What do the Gurus say about returns?
It’s pretty clear that anyone who is minimally experienced or knowledgeable thinks a prudent estimate is about 5% and the politicians who need to spend retirees' money on other stuff pick a number out of the rear end.
What are the odds we are fully funded in 2040?
Back to the original Question what are the odds that ERSRI will be fully funded by 2040. My guess is between 0 and a 5% chance. But this does not have to be a guess. Gina Raimondo in her Truth in Numbers publication sought to put an odds figure on being fully funded by 2040 and at that time they estimated 47%. This comment from a slide deck: "As of July 1, 2012, the investment assumption will be lowered to 7.5%, but the state has <50% chance of reaching that target.
So what is her estimate now? Or Seth Magaziner’s or Auditor General Hoyles ? Perhaps the media should ask those in charge who should definitely know how to calculate this number. To tell us the chances our pension plan will be fully funded by 2040. Gina has proven she knows how to calculate the odds. Why won’t she comment?
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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