Woonsocket Matters to Rhode Island and the Nation

John Hill's Providence Journal article about Woonsocket's deficit problem contains two important lessons ...

The first lesson is that everybody who's interested in these topics should read the Ocean State Current. An article here from last May explains the problem ...

... the second lesson of the article: The public is being poorly served by the way the pension issue is being framed.

Continue reading on the Ocean State Current...

Things We Read Today (44), Wednesday

Government's corrupt pension handling; the discount rate scam; fighting off the zoning inspector; government peeking doesn't count as privacy invasion.

Continue reading on the Ocean State Current...

How Do You "Mediate" A State Law?

... that, slightly rephrased, was the reaction via Twitter last night of John Ward to the news that

Superior Court Judge Sarah Taft-Carter on Tuesday ordered the state and the coalition of public employee unions challenging the General Assembly’s overhaul of their retirement system to meet with federal mediators and see if a settlement can be reached before the case moves to trial.

In the above ProJo article, reporter Tom Mooney also alludes to Ward's important point, albeit in a somewhat understated manner.

What’s in dispute is the constitutionality of a law, a question usually left to a judge to decide.

Also on Twitter:

> Anchor Rising's Andrew Morse spotted the larger, potential silver lining of such an approach.

If I don't like how a law impacts me, can I also get a judge to order Federal mediators to negotiate changing it?

> Justin Katz points to what is undoubtedly a complete side issue to the ruling.

So an RI judge w/ 3 living family generations in the state pension system gave unions another bite at the apple to undo reform? Surprising!

> And Jason Becker goes to the root of the lawsuit, if not the ruling.

I'm just, surprised no one seems to talk about the fact that this isn't about process as much as increasing benefits again.

Indeed - increasing the benefits from pension reform that was wholly inadequate to begin with, in large part because the original pensions were exceedingly, patently unaffordable to begin with.

Things We Read Today (43), Tuesday

Explaining Rhode Island's decline in four brief sections: legal process, the economy, the media, and fashionable graft.

Continue reading on the Ocean State Current...

Things We Read Today (39), Thursday

Critical thinking sexism in Providence schools; a masculine career in disability; indoctrination; gambling on the law; an earnest pun.

Continue reading on the Ocean State Current...

10/25/12 - Brown University Municipal Pension Panels

4:04 p.m.
With my second fortunate parking experience in Providence this week, having found a parking meter that was already almost at 2 hours time, I've settled in for a rousing discussion of municipal pensions at Brown University's Salomen Center, hosted by the Taubman Center for Public Policy.

Continue reading on the Ocean State Current...

Things We Read Today (16), Friday

The narrative of the candidates; death panels and pension boards; the endgame of government debt; an enemies list.

Continue reading on the Ocean State Current...

Things We Read Today (13), Tuesday

Days off from retirement in Cranston; the conspiracy of low interest rates; sympathy with the Satanic Verses; the gas mandate; and the weaponized media.

Continue reading on the Ocean State Current...

The Risk of Investment Promises May Be Unhedgeable

Early in the summer, Rhode Island General Treasurer Gina Raimondo announced that the state had invested $900 million of its pension assets in hedge funds.  The decision was actually made in the middle of last year, in response to an asset liability study, treasury spokeswoman Joy Fox tells the Current.  At that point, the treasurer began accumulating resources in cash to transition it into the new strategy.

Continue reading on the Ocean State Current...

Nationwide Unfunded Pension Liability Now up to $4.6 Trillion

About a month ago, I presented a comparison of estimates for the nation's public-sector pension problem. While none of the results were encouraging, there was huge variation in the degree of frightfulness — the difference mainly being in the way in which they calculate liabilities.

One of the economists, Andrew Biggs, of the American Enterprise Institute, has updated his findings for State Budget Solutions, bringing the highest unfunded liability estimate currently on the table to $4.6 trillion.

Continue reading on the Ocean State Current...

A Decade of Moving Next Door

I've been following taxpayer migration data for years, but in a haphazard way. A new study that I've coauthored for the RI Center for Freedom & Prosperity finally gave me the opportunity to review all fifteen years of available data from the IRS.

The picture — from the 2003 beginning of what can only be described as an exodus — is frightening. After accounting for the tens of thousands of Rhode Islanders who moved to other states and other taxpayers who moved in the opposite direction, Rhode Island lost 24,455 households, with $1.2 billion of annual income (not inflation adjusted). More conspicuously, a net 3,406 taxpayers moved right across the border, to abutting counties in Massachusetts and Connecticut, taking with them $254.5 million in annual adjusted gross income (AGI).

Continue reading on the Ocean State Current...

Warwick's Pension Numbers Serve as National Example

The local efforts by the Rhode Island Center for Freedom and Prosperity to shine a light on the pension mess have brought national attention:

A locally published interview with a member of the national pension task force, assembled by the RI Center for Freedom & Prosperity, has caused a stir in Warwick, puzzling the Mayor, confusing the local paper, and leading to an online rebuttal. Even the Providence Journal has covered the action.

On May 24, the Warwick Beacon published an article from an interview with Eileen Norcross, senior research fellow and lead researcher on the State and Local Policy Project with the Mercatus Center at George Mason University, attempting to refute her warnings that the City of Warwick is not accurately representing the true scope of the liabilities in its locally administered pension plans.

Norcross published a pie-chart, which she has now updated:





Norcross explains the logic behind her adjustments:

The chart shows Warwick, Rhode Island’s municipal budget (excluding the school budget) carved up according to current costs for funding the town’s pension benefits, Other Post Employment Benefits (OPEB), current employee healthcare costs and General Obligation bond payment. The figures come from official budget documents.

My value-added is that I estimate the additional amount needed to fully fund pensions based on the risk-free discount rate. It’s a ballpark estimate backed into based on the plans’ valuation reports. The actuaries, with access to all the plan data, can model the effect of applying the risk-free rate to plan costs more precisely.

Follow the link to read her entire explanation (and here is another national perspective supporting her analysis from National Review), but here is the root of it:

Public pensions represent a secure, government-guaranteed benefit and are not likely to be defaulted upon. Public pensions should be valued like a government bond. The rate to use is the return on Treasury bonds, currently 2.3 percent.

But what policymakers are worked up over is not the economic principles behind discount rate selection. It’s the practical effect that many politicians and plan sponsors protest, as The New York Times story of yesterday highlights. Lowering the discount rate increases the liability and the amount needed to fund the plan. That has a real impact on the budget, as the Warwick chart shows.

Even if you buy the argument that the 3% figure used by Norcross is too low, it's still fantasy-land to use 7.5% as a basis.

New York Pension Fund Rate of Return Disappoints: Is It Still Cooking the Books When the ACTUAL Rate of Return Drops?

When General Treasurer Gina Raimondo led the way in edging down the projected rate of return for Rhode Island's state pension fund from 8.25% to 7.5% (and tweaking life expectancy assumptions for the system), the President of the Cranston Firefighters Union, Paul Valletta, accused her of cooking the books to create a problem where none existed.

The New York State and Local Retirement System just ended its fiscal year. Don't tell Mr. Valletta but its rate of return, while respectable, failed to meet expectations.

The New York State and Local Retirement System (NYSLRS) closed its most recent fiscal year with a return of just 5.96 percent — well below the 7.5 percent target rate used to discount its long-term liabilities.

So is the entire stock market now participating in the wilful cooking of pension books? Or, more likely, today's New York Times has hit on the explanation.

Few investors are more bullish these days than public pension funds.

While Americans are typically earning less than 1 percent interest on their savings accounts and watching their 401(k) balances yo-yo along with the stock market, most public pension funds are still betting they will earn annual returns of 7 to 8 percent over the long haul, a practice that Mayor Michael R. Bloomberg recently called “indefensible.”

Now public pension funds across the country are facing a painful reckoning. Their projections look increasingly out of touch in today’s low-interest environment, and pressure is mounting to be more realistic.

These words were printed in a newspaper that is not exactly a bastion of conservatism or champion of the taxpayer. Despite that, it is quite possible that "realistic" will remain defined, in some small circles, as "cooking the books".

Undoing the Central Falls Settlement with Some Last Minute Legislation?

Can't talk about the bill, it's still in committee...
Can't talk about the bill, it's still in committee...
Can't talk about the bill, it's still in committee...
Why do you want to talk about that bill? Everything important about it was decided in committee.

Justin Katz of the Ocean State Current (and Anchor Rising too) has a report on what looks to be the first salvo in the hurry-up final phase of the legislative session. Senator Elizabeth Crowley of Central Falls has submitted a bill, apparently at the request of the RI Department of Revenue, that would allow any municipality under state oversight and running a local pension system to move into the MERS system. In part, this bill is a follow through on a promise that was made as part of the Central Falls bankruptcy settlement, where the Governor agreed to help Central Falls transition to MERS.

But there may be more to the promise -- or, as pols have become fond of saying these days, perhaps the promise has evolved. In addition to facilitating a move to MERS, the Governor's office has also been advocating for a $2 million to $2.6 million so-called "transition fund", designed to temporarily soften the effects (for a period of five years) of the bankruptcy agreement which reduces the benefits that will be paid to Central Falls pensioners. As a Projo staff report from the end of April mentioned, the creation of the "transition fund" also serves the purpose of helping to convince some people impacted by pension changes not to pursue a lawsuit.

Meanwhile, Senator Crowley's bill is separate from the transition fund. She told the Current that its intent is to "return [Central Falls] pensions to 75% of the payments that they had been receiving before the receiver and a bankruptcy judge reduced them". Though such a provision is not explicit in the current Senate bill, a reference to a "base retirement allowance" of not less than 75% of the pre-settlement benefit for Central Falls retirees is written into the House version of the bill, introduced by Representative James McLaughlin.

If the "transition funds" are approved, and if a floor on benefit adjustments is set at 75% of pre-settlement value, either directly in law or through an amendment to the settlement agreement, and taking effect immediately after the transition period has ended, then it is very possible that the much publicized 55% benefit cut in Central Falls will never occur.

Is this all a good idea? As far as the transition funds are concerned, the question (though not the answer) is straightforward -- should there be a state bailout of the Central Falls pension system, so that the cuts needed to restore solvency aren't quite as deep, at least in the early years. As regards the longer term issues involved in the Crowley/McLaughlin bills, some basic information is needed by both legislators and the public, which the authors and sponsors of the bills should provide with all due speed:

1. Is this proposal revenue neutral, with respect to the existing Central Falls settlement agreement, and...
2. ...if not, where's the extra money coming from to pay for it: a) higher taxes on Central Falls, b) directly appropriated state subsidies, similar to the "transition funds" and/or c) some kind of Rube Goldberg financing via the working of the state pension system.

With recent events in West Warwick, to name just one community, the transition fund proposal and the Crowley/McLaughlin bills also raise the question of whether other communities would be in line to get the same bailout that Central Falls might.

Report: West Warwick Pension System Broke By 2017

WPRI's Matt Smith reports that at a special meeting held this evening,

town leaders said if West Warwick continues on the same path as they are currently on, there will be no assets in the pension fund by 2017.

Officials also said they believe the town is on the same track as the bankrupt City of Central Falls.

The town council was joined by the school committee, town pension board, and Rhode Island department of revenue.

Did he say the Rhode Island Department of Revenue??? Cue ominous music: that's the department which decides whether a municipality gets started down the road of receivership.

UPDATE

Ted Nesi kindly passed along the link to his lengthy and detailed report. One telling excerpt:

The shortfall in West Warwick's pension fund totaled $98 million as of July 1, 2010, which made its funded level just 26%, according to the most recent study by Milliman Inc., the town's actuary. That's nearly as much as last year's entire $107 million town budget.

By the way, Nesi reports that

One in three police and fire retirees in West Warwick receives a disability pension, which are tax-free and worth two-thirds of final salary if the retiree got disabled on the job.

But the West Warwick Pension Board told me that "17.8%" of West Warwick's pensions are disability. Why this discrepancy between what the Board told me and what Nesi is reporting?

Providence Pension Reform: Final Vote Tomorrow

An alert Ted Nesi reports that, in a special meeting tomorrow late afternoon, the Providence City Council will take a second, final vote on pension reform. Note that this would affect not current workers, but current retirees.

The proposal would freeze retirees’ pensions for about 24 years and shave at least $236 million off the city’s unfunded pension liability.

While retirees are not formally represented by a labor union, the reaction from at least one labor leader was predictable in both substance and drama.

Officials emphasized Thursday that negotiations with retirees to craft an alternative compromise deal on pension cuts can continue even if the ordinance is enacted, but firefighters union president Paul Doughty dismissed that idea, warning that approving the changes unilaterally would poison the city’s relations with his members for “a generation.”

This would be a good point to stop and note that one seriously damaging blow to the sustainability of the Providence pension system – 4%, 5% and 6% compounding COLA’s - was implemented in part at the direct hand of labor and via … er, disinformation put forth on their part.

When the union-majority Providence Retirement Board voted to award 6% COLAs in 1989, labor leaders defended the richer benefit as affordable because the city’s pension fund was “one of the wealthiest in the country.” They also incorrectly estimated the COLAs’ cost at only $750,000, while the city put the cost at $22 million."

(These COLA’s do not currently form the basis for new retirees’ pensions.)

It’s been almost two month’s since Mayor Taveras made the Big Ask of Providence retirees. Only a couple of dozen retirees have responded in the affirmative. In that period, Providence has made it onto a list of

cities set to enter default danger zone

If two months are not sufficient, what timeframe would Mr. Doughty like to see for discussions about “bilateral” reform? Does the inexorable ticking of the budget clock and the attendant compounding of a deficit factor at all into such a timeframe?

Providence’s pension system is only 34% funded. If the city goes bankrupt, by one calculation, Providence retirees would face a 73% reduction in pension benefits.

As it stands today, one quarter of the city budget (and one half of the city’s tax income) goes to pension and OPEB alone. Further, as Providence has the second highest commercial tax rate in the country and the seventh highest residential rate, “revenues” are completely maxed out.

Certainly, as Mayor Taveras has repeatedly said, it is far preferable that (retired) labor be a partner in finding solutions to the city’s dismal fiscal situation. I would add: especially as they contributed to the situation in two substantive ways – both via the addition of those exhorbitant COLA’s in the 1980’s and in negotiating contracts which included budget-straining benefits (i.e., pensions). This is not a matter, however, where time is on anyone’s side. Retirees should not take their cue from labor leadership. Foot-dragging will only exacerbate, not improve, the options for rescuing Providence's exceedingly generous and woefully underfunded pension system.

Almonte First into the Democratic Gubernatorial Void?

The Projo's Randal Edgar reported last evening that former RI Auditor General Ernest Almonte is considering running for Governor of Rhode Island as a Democrat (h/t Ted Nesi via Twitter)...

Former Auditor General Ernest A. Almonte said Monday that he is "seriously considering" a run for governor in 2014.

Almonte, who stepped down in 2010 after 15 years as auditor general, said he is talking with friends and associates about the possibility and expects to make a decision later this year....He said he would most likely run as a Democrat.

I know it seems tres early to be discussing the 2014 Governor's race, but one unknown that is going to significantly impact the fate of pension reform in Rhode Island and the state's fiscal health in general is the question of who's going to be the Democratic candidate for Governor in 2014.

If Governor Lincoln Chafee maintains about the level of support for pension reform that he has shown so far (though with all due respect to Jim Baron, I want to see the final version of municipal legislation he proposes, before giving him full plaudits for tackling the issue) and runs for a second term as an I or a D, and either Ernest Almonte or Gina Raimondo becomes a credible gubernatorial candidate on the Democratic side, it will make it significantly harder for opponents of the current version of pension reform to propel someone into the top tier of candidates. And if there's no Rhode Island Democrat willing and/or able to push a don't-worry, the system can be fixed with higher taxes and reamortization message in the Governor's race, chances increase of the changes currently being put into place taking hold.

The question accelerated by a potential Almonte candidacy is whether there is anyone from the traditional spend first, figure out how to pay for it later wing of the Democratic party in Rhode Island with the stature to run for Governor of Rhode Island.

The Banana Peel In Gov Chafee's Municipal Pension Reform Plan

Governor Chafee will unveil his "Critical Plan Empowerment Act-Municipal Pensions" today in Pawtucket.

Ian Donnis got an early look at it. As I read through his article, my hands rose to applaud the Governor's initiative.

Governor Lincoln Chafee’s bill to aid struggling cities and towns — slated to be unveiled later this week – would allow communities to suspend “benefit adjustments,” according to a copy of the legislation obtained by RIPR. ...

"In order to mantain the sovereignty and fiscal stability of as many municipalities as possible, as well as to safeguard the well-being, public safety, and welfare of the citizens of the state and their property, it is essential that the state take immediate and proactive steps."

Then I got to the last sentence of Ian's article.

The bill calls for steering at least 50 percent of money resulting from COLA suspensions to be “reinvested exclusively” to increase a plan’s funded percentage.

And my ovation was terminated before it began.

Many cities and towns do not have the revenue to properly fund their pension plans. Some cities and towns do not have the revenue to maintain day to day operations, much less try to make up underfunded and very generous pensions. Accordingly, how could they have the money to reinvest, exclusively or otherwise, into their pension systems?

50% of something could be a lot unless it's 50% of an empty coffer, in which case, it's zero. An adjustment, modest or substantial, of pensions will not magically make money appear where there is none now. How is this component of the governor's proposal at all feasible?

Cranston Police and Fire Retirees Receiving up to $900 on Holidays

I have no intention of making Anchor Rising an RSS feed for my work on the Ocean State Current, but I think this story is a bit of a doozy.

As the city finds itself downgraded, partly based on the 17.8% funding of its locally administered pension plan, Cranston police and fire retirees are receiving double-and-a-half time for holidays that they do not work and would not be working, anyway.

Cranston Pensions: Rhode Island… with Emphasis

The RI Center for Freedom & Prosperity had published data covering all of Cranston's public-sector retirees, and I've posted a general comparison of the numbers with those for the state system overall.

Negotiate And We Won't Litigate: NEA-RI Brandishes a Paper Tiger

In light of recent court judgements which have failed to uphold changes to public employee retirement benefits and the corresponding possibility that last session's pension reform law will eventually be deemed illegal by a court, NEA-RI's Robert Walsh has a suggestion, via WPRI, for the state: negotiate.

That’s why the four state leaders who pushed through the new pension law should start formal negotiations with union leaders on an alternative overhaul of the system before they lose in court, according to Bob Walsh of the National Education Association Rhode Island.

“The legislative victory that the folks who supported changes in the pension system achieved is going to be short-lived – because it was illegal,” Walsh told WPRI.com on Tuesday. He suggested state leaders should appoint a neutral mediator such as former R.I. Supreme Court Chief Justice Frank Williams to start talks between the two sides.

Surrender, Dorothy!

The complication here is that the specter of yet another unfavorable court ruling may not be as threatening as Mr. Walsh believes. The problem, as we have discussed, is not the unfavorable ruling itself but the reality of its aftermath. Courts can rule all day long that the original, promised benefits - however extravagant and inequitable - are legal. But the court cannot create the ability to pay the benefits if the employer (the state and/or the municipality) simply lacks the means to do so.

The pension reform passed last session by the G.A. fell far short of real reform and represented a substantial victory for labor, as witnessed, in part, by the support it garnered from pro-labor legislators.

It appears that Mr. Walsh is hoping to expand on that victory. If, however, the state were so ill advised as to act on Mr. Walsh's suggestion, the most likely end result - the promulgation of another precursor to one more perfectly legal and unenforceable ruling - would be an ephemeral victory at best.

General Assembly Trying to Further Mess Up the Pension System

House Bill #7201 submitted by State Reps Savage, San Bento, Ajello, Blazejewski and DaSilva is an attempt to force the teachers at the Rhode Island Mayoral Academies (RIMA) into the state pension system. Currently, the staff at RIMA are in a defined contribution plan, or more specifically a 401k plan. They pay into the system, they maintain their own account and they know how much money they will have. To know specifically what this bill is about, all you have to do is read the summary at the end of the bill.

This act would require that teachers, administrators and employees of mayoral academies participate in state teachers’ retirement system. This act would take effect upon passage

Hey teachers at RIMA, are you all aware of this? I hope so and I hope you all react in the same way as you would if these State Representatives were trying to take away your retirement funds, because that's potentially what could happen.

I did wonder what the people working with they thought at RIMA, so I asked Michael Magee, the CEO of the Rhode Island Mayoral Academies:

"Mayoral Academy teachers are highly satisfied with their 100% solvent and very generous matching 5% 401K retirement plan. I can't imagine why anyone would want to force them into the state pension system. We view the Blackstone Valley Mayoral Academies compensation system as a valuable innovation worth studying, not as something to disrupt at the expense of hardworking public school teachers."

Mr. Magee makes an excellent point here. This General Assembly is doing exactly the opposite of what they should be doing. Instead of forcing these teachers out of a plan they're happy with, they should be taking a look at how RIMA is doing things right and see if it is feasible for the rest of the teachers in the state.

Anyone have any guesses on why the Assembly would be looking to do this? How about this one. RIMA teachers seem to be on the younger end of their career, so they have another 20-30 years of work before they'll ever collect a pension. That is 20-30 years of payments into the system. Also that is a whole lot of new money to dump into the system and use to pay the current retirees with. But then what happens in 20-30 years? Who knows. The only thing we do know is that Reps Savage, San Bento, Ajello, Blazejewski and DaSilva will be long gone from the General Assembly and will simply be "mistakes of our past."

And what exactly do you call that when you have new people pay into a system and the money gets paid out to people who paid earlier? Oh yeah, that's called a Ponz...ohhh, you almost got me there. I almost said it and we know that's a no no, right Politifarce?

Is Providence Cooking the Books Now?

Back in October, Rhode Island's pension system also got national notice due to a union official, Paul Valletta accusing General Treasurer Raimondo of manufacturing a crisis:

Paul Valletta of the State Association of Firefighters said Raimondo "cooked the books" with actuarial assumptions and conservative market projections that exaggerate the pension system's problems. He accused her of supporting "draconian" changes to the retirement system to raise her political profile.

"She created this problem and now she's riding in on a white horse," Valletta said.

He accused her of creating this problem when she went to the State Retirement Board and successfully got the board to lower the expected rate of return on the pension system from 8.25% to 7.5%. When the rate goes down, the amount of anticipated "free money" from the stock market also goes down, which needs to be replaced by the taxpayers and other cuts.

We know how the state pension discussion ended up, so let's jump over to Providence. Just one week ago, Providence officials were saying:

The city has defended that 8.5% target, saying it will be able to earn more than the state.

In spite of that defense, Mayor Taveras has been looking at lowering the rate as far back as last summer, and he finally pulled the trigger yesterday, lowering the expected return to 8.25%. This action of course, increased the city's unfunded liability.

It is interesting to see how Providence expects to outgain the state. From Nesi's Notes:

Providence invests its pension fund assets more aggressively than the state, according to data provided by Buck. As of Nov. 1, 85% of the city’s pension fund was invested in equities, compared with 64% of the state-run pension fund for municipalities. That exposes the city to more risk but also could win it greater returns.

The city's fortunes will more rise or fall with the stock market, as it seems the state is in more stable investments like bonds and real estate. As for an explanation on why the city can be more agressive? Maybe the city is younger than the state and has more time until retirement? But seriously, as one who also dabbles in the stock market, I hope the city is right on their bet.

But back to the original point, how long should it take now? 3...2...1...cue Mr. Valletta (or Providence Firefighter Union President Paul Doughty), is Providence now cooking their books too?

Municipal Pensions as Covenant

The principles underlying debate about Providence's ability to suspend the cost of living adjustments (COLAs) of its public-sector retirees are fascinating. On one hand, we're told that they're contractual, unlike the state-level pensions, which are legislated:

Unlike state-level public employee pension benefits, which are set by state law, municipal retirement benefits are incorporated in collective-bargaining agreements. Courts in Rhode Island and across the country have ruled that contractual benefits are harder to cut.

On the other hand, Providence is facing legal difficulties because its COLAs are included in an ordinance, at least for most retirees:

In that long-running case, which the Rhode Island Supreme Court decision likened to the Dickens novel "Bleak House," the court ruled that the city could not cut COLAs granted in the early 1990s. Because a 1991 city ordinance had awarded the 5-and 6-percent compounded COLAs, the court said, they were a vested contractual right and not a “gratuity” subject to change.

Now add in the fact that the contracts were negotiated with labor unions that no longer represent retirees, and which cannot negotiate on their behalf, leaving cities and towns to negotiate with retirees one-by-one. (But let's conveniently put aside the fact that municipal contracts aren't permitted to extend beyond three years, in Rhode Island.) One begins to get the sense that COLAs are a bit to RI law what light is to physics. When declaring them inviolable requires them to be particles (ordinances), then that's what they are; when their inviolability requires them to be waves (contract rights), then they're that, as well.

In short, the retirement benefits represent contracts that never expire and that no collective interest has the authority to renegotiate. No wonder "all but 300 to 400 of Providence’s current 2,900 pensioners retired prior to" a 1995 ordinance reining in COLAs. In doing so, they boarded an ark in which the covenant of their corrupt deals could not be touched.

The Market Undoes Pension Reform

Remember the hoopla when General Treasurer and the state Retirement Board lowered the expected rate of investment return from 8.25% to 7.5%, thus throwing the system into underfunded panic? (Of course, the system should have already been in underfunded panic, but we needn't rehash all that, just now.)

Well, according to Ted Nesi, the return for 2011 was 1.4%:

Rhode Island's state pension fund earned a paltry 1.4% return on its investment portfolio last year, far below its target of a 7.5% annual return, WPRI.com has confirmed.

Treasurer Gina Raimondo's office disclosed the figure for 2011, which is after expenses, in response to an inquiry on Thursday. The pension fund earned 12.5% in 2010, according to the House Fiscal Office.

Raimondo told Nesi that "it's really hard to manage money right now," and the current expected rate of return "is a tall order." Unfortunately, Nesi's number is for calendar 2011 (January through December), while all the pension fund projections align with fiscal years (ending in June). That brings the frightening observation that the return for FY11 was 20%, so either the latter half of calendar 2010 was really amazing, or the latter half of calendar 2011 was even more pitiful than the 1.4% suggests.

Either way, assuming 7.5% from here on out, if the 1.4% carries for the whole of FY12, it will leave the pension system $2.4 billion short by 2035, the year it's supposed to be fully funded, under the pension reform. It's difficult to calculate the effects of such changes on the actuaries' numbers, which are layered with assumptions, but if my analysis is correct, this one bad year means that the annual rate of return will have to be 8.0% to make up the difference.

We could be seeing the Retirement Board exercising its new dictatorial powers sooner than expected.

Public Pension Escrow Accounts?

Liz Boardman and Iain Wilson have an excellent article in Thursday's South County Independent previewing the new General Assembly session from the perspective of some area legislators. In it, Rep Spencer Dickinson (D-South Kingstown) stated that

He plans to call for the creation of state and municipal escrow accounts, so the money is there if the courts overturn the new pension law.

“Passing something you think will be reversed in the courts is taking money now and kicking the can down the road,” Dickinson said. “We should be thinking about that on the state and town level. It’s not found money.”

I asked Rep Dickinson via e-mail where he thought the money would come from to fund city and town escrow accounts in view of the fact that all municipalities were either at break even or in the red. We spoke today by telephone; below is his response.

The possibility that the state will lose [the lawsuit anticipated to arise from pension reform] in court has to be taken seriously. It would be irresponsible not to.

Budgeting of different towns is the responsibility of the councils and the mayors. Where would the money come from [for pension escrow accounts]? that is the responsibility of the town council or mayor.

In any town in Rhode Island, I believe that you could find several business owners who would say that they could look at the town budget and find money. It's the responsibility of elected officials and the mayor but there are people in the community who believe that they could contribute to the process.

The Pension Questions Still Not Asked

So, I'm watching General Treasurer Raimondo's speech upon accepting the Manhattan Institute's Urban Innovator Award (via Ted Nesi). She keeps talking about "solving the problem" and "fixing the pension," and some of the inevitable questions had to do with "what's next" — the assumption being that the state pension problem is fixed.

Still, I don't hear anybody asking two very important questions:

1. You mentioned that you began with a $7 to 9 billion unfunded liability and that your reform saved taxpayers about $4 billion. Where is the other $3 to 5 billion going to come from?
2. The gentleman who introduced you noted that the state had been assuming a rate of return (discount rate) of about 8% while achieving 2%. You said you've adjusted the assumption to 7.5%, yet you answered a previous question by admitting that neither the 10 year nor the 20 year returns hit that number. What happens when the number has to be adjusted down again, thus multiplying the annual payment required?

Contractual Obligation Without Language

The technical considerations of language and history are likely different, but this outcome in Woonsocket doesn't bode well for pension reforms, I'd say:

The city argued that language in one section of the contract mentions dental coverage and refers only to active employees, while other sections extend health-care coverage to retirees, but not dental care.

"The language of the 2002 and 1990 [collective-bargaining agreements] provides little guidance on the issue of dental benefits," Gallo wrote. So a review was warranted "of all the facts and circumstances surrounding the formation" of the two agreements "as well as the ongoing relationship" between the plaintiffs and the city. The judge found that "an agreement creating an obligation may nonetheless be inferred” from the sides' actions and that the city "had an ongoing practice of providing dental benefits to members of the Police Department" regardless of their age.

So the "i" that wasn't dotted was that the contract didn't explicitly say whether or not retirees received dental care, and politicians past were perfectly willing to provide it. It is mildly humorous that the judge would cite an "ongoing practice" that the city wishes to end as a reason that the practice must remain ongoing.

Part of the problem, it seems to me, is that unions and judges alike have an expectation that public officials will continue to handle their budgets as loose collections of expenditures. If savings on something like retiree dental benefits are blocked, they'll dig around for services on which to cut back or push for tax increases. They ought to make it clear that they have only so much money allocated for personnel, so the lost savings will have to be made up in other ways; salary reductions would make the clearest statement.

Of course, by that route, we run into arbitration, which is binding for public safety employees, which really emphasizes the tilted playing field created by public unionization. The union organizations invest resources to elect friendly public officials. They then negotiate with those same politicians with much more visibility and privilege in the process than is provided to other taxpayers and voters. When circumstances change — whether because of taxpayer reaction when the details are revealed or because hard times arrive — they go to court, where other public employees are apt to find inferred rights. Where the proposed changes are applied to new contracts, rather than existing benefits, the unions can dig in and wait for arbitration, whereby an unelected mediator with more incentive to please unions than taxpayers is hired to resolve the differences, in some cases issuing edicts that have the force of law.

How Easily the Hybrid Pension Reform Can Be Undone

Here's a question: As Rhode Island legislators seek forgiveness for their pension reform votes, just how much will the unions have to improve their overall negotiating stance in order to completely eliminate the adverse effects of the hybrid component of that reform? The answer: Seen in terms of annual raises, a 2.5% increase — that is, a 4% average annual raise becoming a 6.5% average annual raise — will leave a 30-year employee with exactly the same pension as if the hybrid had never happened.

Of course, employees will be receiving the raises, not to mention a 1%-of-pay annual deposit into their defined-contribution accounts. The upshot is a 0.75% or so increase in pay every year above what otherwise would have been given will completely undo any savings in lifetime pay and pension that the people of Rhode Island gained by implementing a hybrid pension system.

Chafee's Role in Warwick's Pension Mess

In a GoLocalProv story that reiterates much of what I wrote about back in April, Russel J. Moore also explains the mess that Warwick's pension system is in and also traces it back to then-Mayor Lincoln Chafee:

Governor Chafee has been an outspoken advocate for municipal pension reform. But several of the issues in Warwick, can be directly traced to his administration. For instance, the Police and Fire I plan, which is dangerously underfunded and acts an as albatross to Warwick’s other pension plans is currently funded on a 40-year schedule. This was implemented in 1995—when Lincoln Chafee was Mayor of Warwick. Government Accounting Standards Board (GASB) standards, which are federal guidelines that municipalities are supposed to adopt, and are solidified in state law, (General Law 45-10-15) say that a plan should not be funded over a period shorter than 30-years.

Remember, "no one is to blame" for our current pension problems? Right.

The Horse Looked Desirable; That's Why It Was Deadly

In a post illustrating why he's risen so quickly to the status of "must read" and why it's so crucial to have intellectually curious people making their full-time livings investigating state-level politics and government, Ted Nesi responds to my incredulity at everybody's willingness to accept the pension reform narrative. This is the most important paragraph of Ted's post:

All of them had different opinions on the best approach to shore up a significantly underfunded pension system like Rhode Island's. But I never talked to anyone who dismissed the changes enacted here — the nation's highest public-sector retirement age; a years-long COLA freeze; a limited reamortization; a hybrid plan for most workers — as fig leaves. These are significant, consequential policy changes. And with big increases in pension contributions looming next year, is that really any surprise?

Much of the difference between Ted and me can be traversed with the reminder that I didn't use the image of fig leaves, but of a Trojan horse. A Trojan horse is dangerous, in the first instance, because on its surface it's desirable enough to lure defenders to bring it within the city walls. A hybrid plan, later retirement, COLA suspensions, changes in the formulas for calculating base pensions... these are all desirable reforms, but the "how much" and "what else" are what matters.

Even by the admission of enthusiastic supporters of the bill, the actual reforms covered less than half of the total liability problem. If one considers that reamortization cost nearly two billion dollars, it's reasonable to suggest that the amount of the problem only shrunk about a sixth or seventh. If one expects the 7.5% assumed return to prove much too optimistic, then this reform will look like a bare minimum to get by in the present.

And then comes the invading army hiding in the belly of the reforms, which Ted neglects to cite in his response: The Retirement Board (7 of 15 members labor appointed) will now dictate legislation for future changes that address the other 5/8, 6/7, 17/18, or whatever of the liability that remains to be solved.. The 5.5% privatization tax and any other post facto concessions from the legislature (such as binding arbitration) are additional legions. Meanwhile, the unions will endeavor to scale back the hit that they've taken, on one front through the courts, and on a second front by whittling in the legislature. (Take note that the NEARI president has "fix this law" first on his agenda for the next session.)

As to whether a reform more to my liking — the main criterion of which would be actually solving the problem — would have passed, I don't know. If it had not come this year, it would have come next, or the one after, and it would have been more likely to come without all of the deadly catches. As I've suggested before, a step in the right direction isn't worth taking if it leads into a fatal trap. I'm increasingly confident that this reform, beyond making the larger pension problem more difficult to solve in the future will wind up thwarting a number of other reforms having nothing to do with pensions and without which Rhode Island will continue to slide toward insolvency.

The Reason Behind Pension Credulity

In his Sunday Providence Journal column, Ed Fitzpatrick reviews the passage of pension reform, and I have to say that he contributes to my surreal feeling of different realities based on different narratives:

Keep in mind that this isn't Texas: This happened in Rhode Island, a deep-blue state where unions are considered a legendary force at the State House

Keep in mind that this happened under Governor Chafee, the Republican-turned-independent who ran with union backing and is seen by some as being just to the left of Bernie Sanders, the Vermont senator who describes himself as a democratic socialist.

Keep in mind that this happened thanks to Gina M. Raimondo, a Democrat who had a top Laborers' union official on her transition team. It happened thanks to a General Assembly dominated by Democrats; thanks to Gordon D. Fox, D-Providence, who became House speaker amid concerns that he'd be too liberal; and thanks to Senate President M. Teresa Paiva Weed, D-Newport, who has union officials on her leadership team.

Yet, in the end, it wasn't even close.

Wouldn't it be reasonable — no, obvious, obligatory — at least to wonder out loud whether there might be something more going on here than the advertisements and political speeches proclaim? I mean, not only does Paiva Weed have union officials on her leadership team, but they voted for the bill. Senate Majority Leader Dominick Ruggerio (D, North Providence, Providence), who exchanges nepotism jobs with his fellow high-paid union leaders, voted for this pension reform bill. Why does it feel like Anchor Rising is the only outlet in Rhode Island concerned that maybe, just maybe, there are some major catches built into this reform — perhaps so dramatic that the actual "reforms" were boards on a Trojan horse?

I think Fitzpatrick gives a piece of the answer when he subsequently writes:

In short, it was not like Wisconsin, where Republican Gov. Scott Walker engaged in a bitter battle with public employees, [Raimondo] said.

Others in the media have talked about how reform never would have happened with a Republican executive slate. I can't help but wonder — as big government chokes on its weight and proves unable to repair itself nationwide, as the collapse of entitlement programs approaches inexorably, as treasured Democrat-left solutions to economic downturns prove ineffectual and (surprise!) prone to corruption, and as the great beacon of hope, President Obama, disappoints on a historic scale — if pension reform didn't tap a deep need to believe that sitting down and negotiating in order to reach a result that benefits everybody is actually possible, provided a few technocratic figures show the resolve and leadership of demigods.

The Wisconsin comparison is telling for two reasons: First, Rhode Island's pension reform is simply not sufficient to solve the problem, and apparently, it was soft enough to gain support even within the ranks of union leaders, leading one to believe that the payoff, for entrenched powers, will ultimately be greater than the surface sacrifices. Walker's reform efforts were much more substantial and struck much more clearly at the heart of Wisconsin's problems.

Second, a large part of Governor Walker's difficulties can be explained by the act of several Democrats in fleeing the state and short-circuiting the legislative process. I don't believe that Rhode Island Democrats are any less friendly to labor than Wisconsin Democrats, nor do I believe that they are any less capable of dramatic tactics to thwart reforms that they do not like. Rather, I'd suggest that the absence of anything but a few public performances and aggressive letters (leaked or otherwise) is evidence that the reform fell well short of where it should be.

Yes, the unions will sue, in part to prevent legislators in other states from getting the wrong idea about what happened in Rhode Island. Yes, they'll make lots of noise about voting legislators out, mostly as a negotiation tactic to push their agenda through the next session of the General Assembly. But the snarl doesn't reach their eyes. What we've seen in Rhode Island wasn't the objective process of lawmaking as it should work; it was the variation of political theater performed when the powerful backers are ultimately getting what they want. Look to Wisconsin for the variation that one can expect when they aren't.

But for the time being, it appears that the performance has been enough to reinforce belief that a blue vision for government can work. Sadly, even some who ought to know better have fallen for it, too.

He Didn't Know It Was In The Bill!

This is a bit of a bombshell that might get glossed over by the media. According to Ian Donnis over at WRNI, Governor Chafee didn't know that the 5.5% new tax on contractors was in the pension bill when he signed it.

Chafee was unfamiliar with the amendment imposing the 5.5 percent assessment when asked about it after signing the pension bill.

Seriously? Ok, so the bill is 114 pages long and they only gave him about 18 hours in between passage and his signing. Who can be expected to read all that?

What this really leads me to ask is where was he while the Assembly session was going on? Why wasn't he following the discussions first hand? In the State House, the floor discussion is available in many rooms, likely including in the Governor's Office. Why wasn't his staff following what was going on? No one in the Governor's Office either knew that the 5.5% tax was added to the bill or thought to tell the Governor?

Remember Chafee's campaign slogan? "Trust Chafee" But we can't even trust him to know what is in a monumental pension reform bill that he signs? Sorry, I just can't trust Chafee.

Pension Reform Bait-and-Switch to Block Broader Reform

I've placed the 5.5% privatization tax in the context of the General Assembly's history of opposing such money-saving measures and pondered the language of the newly minted statute.

My concern, in brief, is that there really isn't anything limiting the application of the 5.5% "assessment" to state privatization. The only limit mentioned is to the displacement of employees included in General Law 36-8, which establishes the pension system. In other words, it appears to apply to any government agency that participates in state pensions, whether state, school district, or municipal. Mayoral academies, for example, can opt out of the pension system and so may be threatened with the surcharge. The limiting factor will only be how aggressive the folks who write the resulting regulations wish to be.

Even if the law does wind up limited to employees of the state, reformers should fear its effects on others of their strategies for improving government, notably consolidation. Any function moved from the municipal to the state level will now become permanently "in house."

Frankly, this sort of legerdemain is bound to happen when opposition parties jump on a fast-rolling bandwagon like pension reform.

A Tourniquet on the Knee for a Gushing Thigh

Christy comments to the post in which I express some exasperation with supporters of pension reform:

This bill is a giant step in the right direction for Rhode Island and while I appreciate some of what you have said here don't forget that the system's recipients are people and when these people die, the state's debt to them is cancelled. New employees will pay into a system that is much more closely related to a private sector 401k, and tied to the market. So yeah, it will take a while to get to 80%, but this bill doesn't pull the rug out from under current retirees (regardless of what the union bosses were saying.)

Put aside a minor adjustment for the reality of survivor benefits. My entire point, with respect to the just-passed pension reform is that the system will not make it through that long "while to get to 80%," much less 100%, without significant additional changes, and this particular reform sets up a system that ensures that those changes will not represent additional steps in the right direction.

Let's say, for the sake of illustration, that when time and economics have run their course, it turns out that Eileen Norcross was correct to put the actual present unfunded liability of the pension system at $18 billion. So far, with this round of legislation, we've addressed the problem to the extent of $3.2 billion in reforms and additionally pushed back the financial pain with re-amortization, which effectively added $1.8 billion to the amount that the state will have to pay beyond its investment returns.

So, if we look at the liability in terms of money that the state has to come up with, we're still in need of $16.6 billion dollars. What happens when that burden again reaches crisis proportions?

Well, the newly minted law puts further reforms in the hands of an unelected board of 15 people, seven of whom are directly appointed by the union organizations that have been opposing even the meager reduction of as-yet-unearned benefits for their members. Is it likely that the Retirement Board will return for further reductions in promised pension benefits to those currently reaping the rewards of the pension system or those still paying union bosses' salaries through their dues? Is it likely that the General Assembly will pass up the opportunity to declare that the Retirement Board has tied its hands?

Not really, and in the meantime, the hybrid plan will be taking 6% of payroll out of the equation both for defined-benefit investment returns and for use in further reforms. It may be that the $18 billion number is too high, but the value of the hybrid system decreases in direct proportion to the accuracy of the General Treasurer's lower number. That is, if the investment return is near the Retirement Board's predicted 7.5%, then the hybrid plan is more costly than the old plan; if the investment return is lower, the hybrid plan will offer savings (albeit only for employees who haven't even retired yet), but we'll have an eleven-figure liability on our hands for the system overall.

In other words, we're looking at massive tax increases, probably eased with a regular series of reamortizations perpetually postponing the fictional day on which the system will be self-sufficient. Of course, the way the Retirement Board power grab is structured, it'll be the better part of another decade before matters come to a head, giving everybody plenty of time to rewrite their personal history of adulation for this reform and the politicians who foisted it on us.

The comfortable narrative that everybody is telling themselves, just now, is that the very people who allowed the pension mess to reach its current point saw the light thanks to the determination of a few strong leaders... some of whom have been in office for a long, long time and all of whom are members of the union-backed Democrat machine (yes, that includes Governor Chafee). Hey, maybe that's the case. I'm just having a hard time buying it.

Even the Pension Bill Succeeds in Making RI Less Business-Friendly

One of the very few amendments that was successful in yesterday's pension bill Assembly session was put forth by the Finance Chairmen in both the House and the Senate. Helio Melo in the House and Daniel DaPonte in the Senate. The amendment reads:

42-149-3.1. Assessment on state expenditures for non-state employee services. –
Whenever a department, commission, board, council, agency or public corporation incurs expenditures through contracts or agreements by which a nongovernmental person or entity agrees to provide services which are substantially similar to and in lieu of services hereto fore provided, in whole or in part, by regular employees of the department, commission, board, council, agency or public corporation covered by chapter 36-8, those expenditures shall be subject to an assessment equal to five and one-half percent (5.5%) of the cost of the service. That assessment shall be paid to the retirement system on a quarterly basis in accordance with subsection 36-10-2(e).

Basically any time the state needs to outsource a project, that business/contractor must pay the pension system an extra 5.5% of the contract. A new tax.

Wouldn't it seem that this provision really just made everything more expensive for the state? If I want to provide a service to the state that would normally cost $1M, well now I need to charge the state $1,055,000. It seems yet again, they think that when you tax a business, they're just going to eat that cost and not pass it along to the customer. But in this case, the state is the customer, and when the state is the customer and it is using state money to pay the contract, guess where that comes from? The taxpayers. Haven't we talked about this before?

ADDENDUM:
On the Matt Allen Show today, General Treasurer Raimondo said that this 5.5% new tax had been discussed in concept but other than that, she wasn't aware that it was going to be enacted. This amendment was brought out by the Finance Committee chairs at the last minute? Why? If anyone has access to alter the bill during the hearing process, it is the chairs. Why didn't they put it in during the hearings? The impact was never studied, why was this done at the last minute?

Pension Reform Bill on its Way to Passing Passes

According to members of the RI press corps providing blow-by-blow coverage of the pension reform bill floor debates via Twitter (Ted Nesi, Ian Donnis, Bill Rappleye), save for an initial amendment backed by leadership that doesn't seem to make any major changes, debate on amendments in the RI House of Representatives has closed with no other amendments being passed, and the Senate has already passed the final bill with the same amendment that was added in the House, and no other amendments formally considered.

UPDATE:

And just as I post the above item, Ted Nesi tweets...

Amdmt that passed from leaders includes 5.5% tax on state contractors as labor wanted. Earhardt says that will be a problem.

So I guess it's still accurate to say there were no major changes to the actual pension plan, just the addition of a new tax.

UPDATE II:

The House has passed the pension reform bill, by a vote of 57-15. The 15 Reps who voted against were...

Carnevale, DaSilva, DeSimone, Dickinson, Fellela, Guthrie, Hull, Jacquard, Johnston, Lima, Medina, Menard, Messier, Palumbo, San Bento

UPDATE III:

Rhode Island General Treasurer Gina Raimondo has made her public statement celebrating the passage of the pension reform bill...

This legislation represents the culmination of 11 months of thoughtful analysis and input from all stakeholders. It is affordable, sustainable and secure.

The legislation will:

• Save taxpayers approximately $4 billion over the next 24 years.
• Keep costs steady and predictable for taxpayers for decades to come, while sharing the risk fairly among all groups – state employees, teachers, municipal employees and taxpayers.
• Provide retirement security to all of our public employees.
• Immediately reduce the unfunded liability by about $3 billion.
• Bring the funding status of the state-administered pension system from 48 percent funded to over 60 percent funded and put it on a healthy path.

Pension Reform: It's Like Obama for Rhode Island

Recall the 2008 election season — with its outrageous claims of the world healing and revival that would accompany the election of Barrack Obama to the Presidency of the United States? Some folks appear to desire the same mystique for pension reform in Rhode Island.

Among them, apparently, is Alan Hassenfeld, former head of Hasbro and current EngageRI member, who in a Projo op-ed (not online) declares:

... if Rhode Island becomes one of the first states to tackle this thorny fiscal issue with a progressive and bold reform, it will send a signal we are open for business, because the pension line in the budget will become predictable. Our lovely little state, with its rich history and winding shoreline, will be a magnet for companies looking to relocate. Our tax base will broaden, our schools will continue to improve, and we'll be able to invest in infrastructure and take care of those who can't take care of themselves. It's a future we all want and make no mistake, it is very close. We must not let this opportunity pass us by.

Baloney. In practical year-to-year budget terms, this reform merely keeps the state-level pension bite roughly the same (only a little bigger next year than this). It does so because the Retirement Board exploded next year's pension payment by adjusting the expected rate of return from an outlandish 8.25% to a mildly less outlandish 7.5%, thus increasing the amount that taxpayers must kick in. And the reform achieves its reduction in payment in large part by reamortizing the debt, thus costing an estimated $1.8 billion in lost interest over the amortization period.

The reform doesn't even touch the liability that has accrued thus far, merely reducing the rate at which it expands, and to address this untouched albatross, it all but hands legislative power to an unelected board dominated by union appointees to readjust the payment plan in the future. (My prediction: Increases in taxes and additional amortization unto infinity.)

About the most it is reasonable to say about this reform is that it points in the right direction, but any organization that zips into Rhode Island out of enthusiasm for our "strong leaders" (as the title of Hassenfeld's op-ed puts it) will quickly discover that it's the same old over-taxed, over-regulated, over-mandated playground for insiders, the collective, and the rich that it has always been.

The Conflicts of Governance that the Pension Reform Law Could Create

Predicting that the pension reform bill will be passed by the RI legislature mostly as reported from committee, Jim Baron of the Pawtucket Times has far and away come up with the best imagery for describing how the floor debate will likely play out...

Much like the budget process, individual legislators will be welcome to submit dozens of amendments, they will be able to argue about those amendments for hours on end, then they will get to watch each amendment peter out in a little puff of smoke, fall toward the earth and disappear without a trace, like the little twinkles of light from Fourth of July fireworks.

However, if H6319A/S1111A does pass as is, and if the provisions relating to endangered pension plans ever need to be invoked, serious constitutional ambiguities in the bill could create conflict within the legislative process.

On Monday morning, I put a series of questions by email to the Governor, the General Treasurer, and the House and Senate Leadership regarding the constitutional issues, figuring that the Governor would have a definite position on the possibility that his veto power is being nullified by the legislature, that the leaders of the House and Senate (especially the Senate Leader who was described in a recent newspaper article as being “fiercely protective of the Senate”) would have definite positions on the independent judgment of the legislature they lead being subordinated to a non-legislative board, and the General Treasurer would have on-hand some reasonable estimates relating to the likelihood of the constitutional oddities in the bill being triggered.

As of the time of this posting, I haven't received any specific answers to the questions posed. I do understand, with all of the lobbying and concern that this bill has generated, two days is a short period of time to expect answers to every question that could be raised about its content. But then, I'm not the one who decided on just seven days between the unveiling of the final version of the bill and its being voted on.

For the Employees’ Retirement System of Rhode Island (ERS), the Municipal Employees’ Retirement System of Rhode Island (MERS), the Rhode Island State Police Retirement Benefits Trust (SPRBT) or the Rhode Island Judicial Retirement Benefits Trust (JRBT), an "endangered status" pension plan will be defined in a new section 36-10.2 of Rhode Island law as a plan that...

(i) Has a funded percentage of fifty percent (50%) or less; and
(ii) The plan’s funded percentage has decreased for five (5) consecutive plan years.

When a pension system enters endangered status, 36-10.2 will require a process to begin where the state retirement board develops two "funding improvement strategies". One of the funding improvement strategies is called the "Default A" strategy which, according to the proposed law...

shall show increases in employer and employee contributions under the plan necessary to achieve the applicable requirements…assuming no amendments to reduce future benefit accruals under the plan.

The retirement board is also required to send the legislature a second funding improvement strategy. If the legislature doesn't approve the second strategy within a certain amount of time, the law states that Default A shall be enacted.

From a practical perspective, the first question to worry about (and that I put to the various RI government leaders involved with pension reform) is how likely is it that plans will enter endangered status, triggering the funding improvement strategy process...

1. Based on the current condition of the pension systems covered by the proposed section 36-10.2, how likely it is that the endangered status conditions will be met, i.e. over the course of the next decade, how many times should we expect the retirement board to be writing funding improvement strategies?

And if funding improvement strategies are ever to be used, the first constitutional and legal question that must be answered is...

2. Are the funding improvement strategies written by the retirement board intended to create legally binding appropriations, or recommendations only?

If the funding improvement strategies are only intended to be non-binding recommendations (and everyone involved agrees on this) then there aren't any further issues to worry about. However, if they are to become binding appropriations and carry the force of law, then the pathway of their creation and implementation raises a serious set of questions that need to be resolved before any pension plans enter endangered status:

• Does the phrase "shall be enacted" with regards to funding improvement strategies apply to the Governor as well as the legislature...

  3. If funding improvement strategies are legally binding appropriations, are they subject to a gubernatorial veto?

• Does the concentration of fiscal and lawmaking powers in the hands of the state retirement board create a problem (besides being flat-out unconstitutional, but since the political class in RI has a hard time understanding why this in itself is a cause for concern, I'll lay that aside for the moment)? Consider that the state retirement board controls the projected rate of return of the pension system. If that rate is reduced in the future, it would immediately increase the actuarial unfunded liability. If the actuarial unfunded liability is increased, it could immediately put several pension plans on a trajectory towards endangered status -- which means the state retirement board would have made the decision that gives itself the power to impose a "funding improvement strategy" on the legislature...

  4. If the state retirement board makes future changes to the expected pension-fund rate of return that increase the actuarial unfunded liability, then as a practical matter, unless the legislature acts immediately to raise the employer contribution to the pension system through the normal budgetary process, could the retirement board under 36-10.2 assume power superior to that of the legislature to determine how the new unfunded liability is to be addressed?

• Should Rhode Island's earlier experience with a union-dominated retirement board being able to bypass the regular legislative process and create its own benefit plan, highlighted by Tom Mooney of the Projo a few weeks ago, raise a red flag...

  5. Is there a risk that 36-10.2 will recreate, at the state level, the situation that existed in Providence in the 1980s, where a municipal retirement board exercised direct authority to determine benefit levels, leading to a fiscal and a good-government imbalance that contributed to pension-system problems still being faced today?

Unless the conditions defining “endangered status” are so unlikely they will never be met, or “funding improvement strategies” are only non-binding recommendations, this piece of pension reform is likely to create brand new conflicts and uncertainties. Until the extra-constitutional provisions are fixed, Rhode Islanders who are concerned about real pension reform will need to extend the scope of potential government mischief they keep watch for, to make sure that the process being created to give one group in society special powers to determine its own governmental appropriations isn’t wildly abused.

Small Pensions & Double (and Triple) Dipping

Today, on the Rhode Island Center for Freedom & Prosperity blog, I've reviewed pensioners with very low pensions as well as those who receive more than one pension from plans administered by the state.

On the latter count, many appear to involve survivor benefits bequeathed by a deceased spouse who would have received the pension upon retirement, which is a reasonable benefit to offer. But with combined survivor payments coming in at over $60,000 per year for life, it's quite a benefit. Moreover, the number of such payments going to individuals with their own public pensions, combined with the repeated last names on the total pension role, really begins to give one the sense of a class set apart from the rest.

Retirees, the Young and the Wealthy

I've taken a look at the public entities with the youngest retirees, as well as the wealthiest.

Reason #1 That Pension Reform Should not Pass - It's More Like a 47% Rather Than A 95% Solution

On Thursday, both the House and Senate Finance Committees voted out the pension reform bill. Check out Andrew's post for an enlightening if not encouraging round-up/review.

Thursday is also Valley Breeze day. This week's edition contain a letter from Rep. Michael Chippendale and Sen. Nicholas Kettle explaining why they support the bill.

No piece of legislation is "perfect" and "perfection" is in the eye of the beholder. Do I think this bill is "perfect"? No. Do I think it will take a huge step toward solving our fiscal nightmare? Yes. ...

There are those who want this proposed legislation to be defeated because it is a 95 percent solution rather than a 100 percent solution.

I'd like to sincerely apologize for appearing to pick on these two fine legislators. They are undoubtedly only voicing the logic of many who support the bill.

Unfortunately, the math doesn't back such a conclusion. (And let's not forget that "the solution to our pension issue is rooted in math, rather than politics ".)

The unfunded pension liability of the state system alone is $7.3 billion.

The bill as originally submitted takes care of $3.4 billion, or 47%, of this shortfall. With the revisions made by the FinComms - h/t Ted Nesi for the term - that amount drops to 44%.

So this "solution" addresses less than 50% of a pension shortfall that is, if not the worst in the country, heartily competing for that dubious distinction. (Like second worst would make the problem any smaller. Sheesh. Way to trivialize a dire situation, PolitiFarce.)

The Pew Center on the States is undoubtedly correct, as far as it goes, when they observe that

The proposed plan would be unprecedented, both in terms of the employees it would affect and the scope and scale of changes to their benefits

But the size of the liability is also unprecedented, using "unprecedented" now as a euphemism for really, really bad. As we can see from the math, the magnitude of the solution matches neither the depth of the problem nor its billing as "comprehensive pension reform".

Accordingly, Justin is correct that, regrettably,

This bill will not solve the pension problem

Raimondo's Definition of Leadership

Gotta love General Treasurer Gina Raimondo's definition for legislative leadership:

Follow the Senate president. Follow Speaker Fox. Be a leader.

Lead by following! That sounds very Rhode Island.

Real legislative leaders should be asking themselves why this whole process appears to be going so smoothly. Sure, the unions are putting on their show, as they could be expected to do no matter what they actually think of the legislation, but look at the lopsided votes: 10-1 in the Senate Finance Committee and 13-2 in the House Finance Committee.

A word of advice for the EngageRI types: when people you've grown to trust to be wrong and/or crooked suddenly appear to be unified in making a good decision, the decision might not be as good as it appears.

This bill will not solve the pension problem, but it will put the ultimate fix in the hands of a union-heavy Retirement Board. Sure, later retirement dates, COLAs tied to fund performance, and a hybrid plan should be part of an ultimate solution, but Raimondo's solution will not get the system to the status at which they'll serve as a resolution. It points in the right direction, but in the same sense that sending a driver into Point Judith Harbor points him in the right direction to Block Island.

Massive tax increases and/or service cuts are going to come before this thing is fully amortized (if it ever is). If the General Assembly passes this reform, all it will have done is what it always does — namely, to kick the can down the road at considerable cost.

Local Pension Problems - Why's That the State's Problem?

Tonight, the pension bill was passed by the Finance Committees in both the House and Senate. In spite of some recent changes to the original bill, one thing that is not included is any help for the municipal retirement systems.

I've seen and heard of some local mayors asking the General Assembly for help with their own locally-administered pension plans. My first thought when I heard of the mayors asking for help was, "Hey, that's your problem, fix it yourself." That is true to a point, but at the same time, some of the plans may have gotten to the point of being unfixable, or if they are fixable, they'll be very expensive to the local taxpayers.

One such city in this situation is Cranston. Mayor Allan Fung was recently on WPRI's Newsmakers where he explained why cities like his are looking for the help.

Cranston transitioned their city employees over to the state plan, however everyone who was employed by the city before then, still fall under the city pension plan. That number today is 490 people, of which 55 are still working, leaving about 435 as retirees collecting their pension. With those numbers, there is no way to negotiate enough of a savings with those 55 to make the pension costs of the other 435 affordable. With that in mind, and due to the fact that retirees are not members of a union and cannot collectively bargain, Cranston took a step the City Council felt necessary. Under Mayor Steve Laffey, the Cranston City Council legislated a freeze on the retirees' cost of living adjustment (COLA).

The retirees sued in RI Superior Court and won, reinstating the COLA, which by ordinance is a compounding minimum of 3%.

So that's where mayors like Allan Fung are left today. They have an unaffordable pension plan that is non-negotiable and the laws are such that he and the Council cannot make the necessary changes to the retirees' payments. His request to the General Assembly is to pass a law that will let him suspend the COLA to retirees immediately or else he has a massive shortfall in the budget to make up.

According to Fung, if he were allowed to freeze the COLA for five years, he'd be able to save $32 million. If it was frozen for ten years, he'd save just under $50 million and if the freeze was for 15 years, he'd save $60 million.

If he's not given this kind of relief by the state, he will need to make up for an 8% gap next year either through increased taxes or service cuts. Over the next ten years, that amounts to approximately $92 million in some combination of increased taxes and service cuts.

According to riliving.com, Cranston already has one of the highest tax rates in the state with a residential rate of $20.26 per $1,000 assessed with no homestead exemption. Only three other towns are higher and also do not offer the exemption, Gloucester, West Warwick and West Greenwich. Their tax rate on commercial properties is sixth highest at $30.39 per thousand and their car tax is $42.44, good for fifth highest in the state. So it wouldn't seem that Cranston has much room for raising taxes by $8-10 million a year for the next ten years.

It appears that Speaker Gordon Fox was prescient last week when he indicated that the pension fixes may be a two-step process, asthe current bill passed by the Finance Committees on both sides of the General Assembly passed the bill in front of them with no help for the locally-run plans.

WPRI's Ted Nesi tweeted yesterday

"Big win for Raimondo, Paiva Weed, Laborers union to keep non-MERS #ripench plans out of bill. Defeat for Chafee, @Angel_Taveras, Fung."

I think I'd have to disagree somewhat. If the Assembly doesn't help mayors like Allan Fung in cities like Cranston, the real defeat will be to the taxpayers that will need to pay for the mistakes of the past politicians.

Pensioners Above Pay

I've added some different cuts of the data concerning RI public-sector pensioners who make more in pension than they did in pay. The most significant takeaway is that COLAs alone don't account for the phenomenon; the top 50 pensioners making more than their salaries have base pensions (not counting COLAs) that are 95% of their salaries.

It really wouldn't be unreasonable for legislators to address "earned benefits" in their reform efforts, considering the unjustifiable generosity of deals granted in the past.

Pension Coverage From Around the RI Interwebs

1. According to Ted Nesi of WPRI-TV (CBS 12), there's little change in the overall fiscal impact, between the original pension bill and the amended pension bill.

2. State Treasurer Gina Raimondo fully backs the revised bill, and is discouraging any amendments that would change around the fiscal particulars (h/t Ian Donnis)...

“In the coming days, I will continue to work with legislative leaders as they move toward final passage. Re-designing the state pension system is critical to moving toward a thriving economy. At this point, I urge caution that further amendments, which could compromise the principles of affordability, sustainability, and security must be avoided.

3. GoLocalProv has posted Governor Lincoln Chafee's statement on the amended bill, where he says that "adoption of this modified bill would be a substantial – but incomplete – step toward comprehensive pension reform", then adds...

I am deeply disappointed that the amended bill presented to the committee today fails to address the problem of our insolvent municipal pension systems. In order to correct this shortcoming, on the first day of the legislative session in January I will introduce a bill to address Rhode Island’s failing municipal pension plans.

3e (e for "editorial comment"). If the Governor submits a local pension bill in January, and the RI General Assembly follows its usual practice of doing nothing fiscally important until June, there is major potential for chaos during municipal budgeting next year. Will cities and towns have to prepare two budgets, one if local pension reform is passed, and one if it isn't?

4. Philip Marcelo of the Projo had an interesting item yesterday, noting that several of the state's labor leaders could be seen coming out of House Speaker Gordon Fox's office, at the same time that the amended bill was being finalized. The speaker's spokesman says that the labor leaders were not involved in discussions about the bill, and there's no indication of whether union leaders used their non-discussion time with state lawmakers to convey a message of "our pension was all right until they played around with numbers" of the kind that AFSCME Council 94 President Michael Downey delivers when he speaks in front of a union audience (link: Jim Baron of the Pawtucket Times), or a message of "room to talk about" assumptions about investment return and life expectancy and other pension parameters of the kind that AFSCME Council 94 President Michael Downey delivers when he speaks to a broader audience (link: RI-PBS' "A Lively Experiment").

5. The provision where the state retirement board can write legislation that "must be enacted" by the legislature is still part of the bill, and is still unconstitutional, and I find it hard to believe that the Speaker of the House and Senate President actually realize that they are giving up their authority to set the legislative agenda in certain cases to a panel of non-legislators, given that they don't even give that power to their own membership at the present time.

Charlie Hall Puts COLA's In Perspective

Courtesy the soon-to-be-dark (sniff) Ocean State Follies.

Pensions Beyond Pay

We all get that cost of living adjustments (COLAs) can carry a retiree's pension above his or her highest working salary, and it's not necessarily insidious. Somebody who lives long enough to be retired for thirty years has seen inflation erode the buying power of a dollar such that a salary from the early '80s might not cover basic expenses.

But I've taken a closer look at the phenomenon, and the reasonable scenario that I've just described doesn't appear to apply. For one thing, older retirees appear much less likely to have pensions that exceed their final salaries than retirees who've been off the job for just a few years. For another, the entity for which the retiree worked appears to make a significant difference.

So If The Books Are Cooked And The Return Rate Is Underestimated

... Mr. Valletta,

Paul Valletta of the State Association of Firefighters said [General Treasurer Gina] Raimondo "cooked the books" with actuarial assumptions and conservative market projections that exaggerate the pension system's problems. He accused her of supporting "draconian" changes to the retirement system to raise her political profile.

then you should have no problem immediately converting your members from a pension to a 401(k). 'Cause if the market return rate on pension/retirement funds is actually north of 7.5%, as you are asserting, obviously, the defined benefit thing is shortchanging public employees.

Right? Shall we prepare the conversion paperwork ...?

[Thanks to a Dan Yorke caller for pointing this out today.]

Removing Pension Dollars from the RI Economy

Union reps and pension testifiers have been arguing that reducing pensions will harm the local economy. Using the RI Center for Freedom & Prosperity's pension database, though, I've looked at some relevant numbers, including the fact that the state sends $142 million in public pension payouts out of state.

Who Is Stealing from Whom?

Not to edge into Andrew's territory in the Great Pension Debate, but a point that a town resident — with whom I often agree on local matters — made when the Tiverton Town Council voted to support "meaningful state-wide pension reform" raises a curious distinction of when government action is "theft":

Audience members Roger Bennis and Bob Martin both spoke against the resolution, on the grounds that the pension benefits formed the basis for a contract between the government employer and the employee.

Mr. Bennis said that pension benefits "had been bought and paid for over the working lifetime of the employee," and the reform that takes benefits away is "theft of previously earned pension benefits."

The article doesn't say whether Mr. Bennis made a distinction between the current reform, which attempts not to decrease benefits that have already been earned, and a more realistic reform that might actually address the pension problem, but in either case, I can't help but wonder: I've worked my entire working lifetime, thus far, to buy a house and build a financial foundation on which to raise three children. If property, sales, and income taxation increases to confiscatory levels (rather, to even more confiscatory levels) in order to support public-sector pensions, how is that not at least the very same degree of theft that Bennis decries?

Oh, sure, the government is empowered to tax, provided due process is respected, but it's also able to adjust legislatively determined benefit levels, especially when there's a pressing public purpose. In cases of bankruptcy, the judicial branch of government has even more leeway.

Mr. Bennis cannot have it both ways. That is, it cannot be theft to remove benefits from public employees, but not theft to increase taxes solely to cover those benefits through wealth transfer.

Give the Unions More Control

Some of the union heads are claiming that this pension crisis was fabricated by State Treasurer Gina Raimondo. She is trying to solve a problem that she created. People like Paul Valletta, representing the Rhode Island Association of Firefighters. His claim:

[Raimondo] cooked the books on this issue... She created this pension problem … now she’s riding in on her white horse … to solve this problem

Other unions are also making claims that the pension problem is not nearly as bad as Raimondo and Chafee make it out to be, in spite of extensive hearings, research and convening a panel that included union management.

When people disagree so vehemently with a given solution, even to the point of accusing one of lying, my response is often to ask what their solution is. What I would like to see happen is people like Valletta put their own reputation on the line in this solution.

How about this, we separate out the firefighters' portion of the pension system and put that separate. We make no changes. We continue forward with the status quo and send periodic updates to the members of the firefighters' union. In each of those updates, we make sure it is known to each of the members that the steps being followed are those that were advocated by Paul Valletta. So when the pension system does go belly-up and those checks start bouncing, don't call the Treasurer, don't call the Governor, don't even call a lawyer. Call Paul Valletta.

Or, why not let the union take over their portion pension system? Here's one thing I've never understood. Treat the union like a sub-contractor. The state simply hires the union like they hire any other contractor. The state pays a set amount to the contractor and the contractor pays its members how it sees fit. Let the union determine salaries, steps, raises, health care plans and retirement packages. They're claiming now that the Treasurer is being disingenuous, so let's see how they do with it. Maybe they can manage it all better. I wonder if the unions are willing to make this agreement and really take over every aspect of the employment. Unions supply staff, the state supplies one monthly payment to the union. Very clean, very orderly, many fewer details would need to be negotiated.

Are Public Employee Pensions Part of or Above the Law?

I attended the final few hours of last night’s House/Senate pension reform public testimony session. While I was there, the great bulk of the testimony was from public union members and officials, repeating variations on the theme of yeah it's a mess, but the young folks have plenty of time to figure out how to pick up the pieces of the mistakes we’ll leave behind and the important thing is that I get mine. Describe the Raimondo/Chafee plan with analogies to theft was common: "picking our pockets", "stealing from union members", etc. In other places, I've seen the Raimondo/Chafee pension reform plan described as "larcenous".

But something can only be stolen from someone if it belongs to them in the first place. So what, exactly, do Rhode Island's public union members think that they own that is being taken from them? Given that the contributions from salary made by RI public employees aren't nearly enough to provide the benefits they currently demand, and their employer raises money mostly through taxation, the only answer is that the state’s public union members have convinced themselves that they own a piece of the future incomes of every citizen of Rhode Island -- even of those yet to be born. This is wrong, on both legal and moral levels.

Limited, democratic governments have no authority to give one group of people permanent and unlimited ownership of the incomes of others. Government has no right to designate "owners", who are free to take as much each year as they say they need from the "owned", with the "owned" being allowed no recourse whatsoever to change the terms of their inferior position. Specifying that relationship in contractual form (or just calling it an “implied unilateral contract”) does not make it a proper use of government power. You could write up something that looks like a contract to sell your neighbor's house to a third-party, but it would mean nothing, because you can't sell, give-away or transfer what you don't own. Likewise, government does not “own” all of society. Government only "owns" the portion of the citizens’ livelihoods and property that representatives accountable to the people decide upon, in an appropriations process that must be renewed and reviewed in a reasonably time-limited budget cycle. This understanding of the limits on what government actually possesses has been a fundamental check on tyranny and absolutism for over 300 years.

This principle is reinforced in Rhode Island law, which explicitly states that no contractual obligation in a municipal public employee contract can extend beyond three years. So how does this get reconciled with claim that past municipal employee contracts bind specific COLA structures 20 years or more into the future? Easily enough! For those willing to assert that union claims on the incomes of others are higher than and untouchable by the law, the first principle of government is that a small group of people are the real owners of the property and livelihoods of everyone else -- but that this is not a cause for worry, because everyone will get a voice in government regarding other matters, after this first order of business is taken care of.

The major problem here, of course, is that such a practice is not consistent with democracy. A democracy cannot accept -- and certainly cannot create -- special classes of people who hold a super-legal position over the rest, entitled to special laws and appropriations all their own, which are unalterable by the people and their representatives.

It remains to be seen if we will have such a class of people in Rhode Island.

Later Retirement Doesn't Harm School Districts' Payroll Costs

The notion that forcing teachers to work an additional five years before retirement will cost districts money came up during my appearance on the Dan Yorke Show, last week, and it apparently has some currency in the General Assembly. Obviously, though, a replacement hired on a five-year delay will cost less than one hired earlier until he or she hits step ten, so to see how the balance works out, I've taken a look at the numbers.

The upshot is that, in the long run, the later retirement saves the district money in salary — which doesn't factor in the post-employment benefits, like healthcare, that it would have to pay for five additional years of retirement under the current system. (In some districts, a later retirement date would eliminate their post-employment healthcare costs entirely.)

Prez of the RI Federation of Teachers: Pension Reform Plan is a Violation of "Civil and Human Rights"

Damn straight. Fight the power.

Leaders of major public unions in Rhode Island used the word “draconian” more than once to describe the changes in pension benefits proposed by Chafee and Raimondo.

They contended that public employees’ will lose too much money in retirement while assuming too much risk by having to enroll in 401(k)-style programs.

Frank Flynn, president of the Rhode Island Federation of Teachers and Health Professionals, said that the state’s pension crisis started out as a “math problem” but is now a “civil and human rights problem.”

Hybrid Savings Mean System Failure

By way of presenting an example, I've estimated the effects of an underperforming market on the current pension system for state workers and teachers and on the proposed system, including the hybrid component.

The upshot is that the hybrid isn't less expensive unless the fund returns less than 5%, and if returns are that low, the total pension system will be well above the costs that have us all so concerned for next year.

Pension Reform Takes Hostages (In Addition to Taxpayers) For Ransom: Current Employees Must Continue to Contribute To The Retirement Fund for The Sake of Retirees

On Friday, General Treasurer Gina Raimondo sat down for an interview with WPRI on Rhode Island's Subject Du Jour. The indefatigable Ted Nesi is posting it in three parts on WPRI's blog. This morning, he released Part Two, which brings into focus the burden which current public employees would carry under the pension reform plan proposed by the General Treasurer and the Governor. [Emphasis added.]

Raimondo acknowledged the proposed hybrid plan in her bill still won’t allow younger workers to opt out of participating in the state pension program. “We need younger people to continue to pay into the system,” she said, or it won’t have enough money to cover the unfunded liability for retirees and older workers.

But the treasurer noted the share of an employee’s 8.75% paycheck contribution that currently goes into the pension fund would drop to 3.75% under the bill, with the rest going into an individual retirement account, a bit like a 401k.

On his program Friday, WPRO's John Depetro and I discussed and and then disagreed about the adequacy of the adjustment - solely a suspension of the COLA - that would be made to the pensions of current retirees and vestees under the proposed reform plan. I contended that it was not big (meaning sufficient); he emphatically stated that it was.

I stand by my view. COLA's are dessert to the six course meal that comprises a public pension in this state. Their suspension is a very good first step. But more needs to be done because Rhode Island still cannot afford the meal itself! With $4.3 billion of the $7.3 billion shortfall not addressed, we're still looking at tax hikes EVEN IF the local pension shortfalls and the unfunded retirement health coverage on both the state and local level are wished away.

Now add to that the clarification that current public employees must divert some of their earnings away from their own retirement and towards the state's moribund (okay, 60% moribund if this pension reform is passed) pension system for the benefit of retirees and vestees.

All the more is it clear that, with this pension reform proposal, not enough has been done to adjust the extremely generous pension benefits promised by elected officials who, over the decades, put their cognitive capacity (heh) into gear just long enough to solicit and deposit campaign contributions from the future beneficiaries of those promises but then threw it into neutral and walked away from the vital matter of fulfilling those promises.

The Cost of Re-Amortization

On Wednesday, on WPRO, Governor Lincoln Chafee compared re-amortization to remortgaging a house. "That's no different," he said. Actually, it's quite a bit different, which the governor might be better prepared to understand if he had more in common with the average Rhode Islander.

The cost of remortgaging comes, first, in the loss of interest that the homeowner has already paid and, second, in the added financing if the homeowner extends the period of the loan. If they know what they're doing, most folks refinance in order to lower the total cost of the loan, not just the monthly payments.

The cost of re-amortization, by contrast, comes in the amount that the state will lose in investment interest by not putting money aside. For an example, look at Exhibits S and T of the state actuaries' analysis of the pension reform law. They put the FY13 employer contribution rate for the reformed pensions at 24.38% of payroll without re-amortization and 20.35% with re-amortization. The rates for teachers are 21.18% and 18.11%. With the Retirement Board's assumption of 7.5% investment returns, this one year's change alone will cost the state $132.3 million by the time the system is fully amortized in 2035.

Exhibits S2 and T2 show the employer contribution rates and expected payroll through 2041 with re-reamortization, which allows one to calculate the expected investment return. Not surprisingly, the contribution rates without re-amortization are nowhere to be found; that would allow us to figure out the amount in interest that the state stands to lose.

However, if we take the percentage difference between contribution rates that the actuaries give us for FY13 and extend it out, we find the amount of total lost investment interest due to the six-year re-amortization to be $1.06 billion by 2029 and $1.71 billion by 2035. The loss may in fact be worth the cost, if that money stays in the RI private sector and generates a return for the economy greater than 7.5% (in turn increasing government revenue), but public officials should do a better job of explaining the cost to voters/taxpayers, and they should better understand the implications, themselves.

Hybrid Pies

To illustrate my point about Treasurer Raimondo's hybrid pension plan, I've posted some pie charts.

As with Cars, a Hybrid Pension Will Cost More

My second pension post on the RI Center for Freedom & Prosperity site points out that the anticipated per-employee cost of the hybrid system will actually be higher than the price that taxpayers are currently being given for pensions.

Negotiating Points in the Pension Proposal

I've got the first of two planned posts about the pension reform proposal up on the blog section of Mike Stenhouse's new Rhode Island Center for Freedom & Prosperity site.

Over the remainder of 2011, I'll be contributing content to the Center on a limited range of topics, pension reform being one of them. My Anchor Rising activities will continue, though... hopefully increasing once a seasonal event that I'm planning for my children's school is removed from my plate after this weekend.

Without getting into too much detail, I'd note that anybody who's thought it might do the state some good to have me researching, reporting, and writing full time can help make that a reality simply by following my links over to the rifreedom.org and participating in the conversation.

Defaulting on Democracy Yet Again

It seems that no plan for fiscal reform in Rhode Island is considered complete until it eviscerates democracy in some way. The pension reform plan submitted to the General Assembly yesterday by Governor Lincoln Chafee and General Treasurer Gina Raimondo is no exception.

The offending section is 36-10.2-7 which creates procedures that both municipalities and the state must follow, if they fall behind on actuarially determined pension funding. Section (2) is an early sign of trouble to come...

36-10.2-7(2) In the event that the state or a local municipality, as the employer of a plan, determines that, based on reasonable actuarial assumptions and upon exhaustion of all reasonable measures, the plan cannot reasonably be expected to meet the guidelines of subdivisions (i) and (ii), then the employer’s legislative governing body shall provide a report to the retirement board...

The "employer’s legislative governing body" is a city or town council in the case of a municipality, or the General Assembly in the case of the state. Just by itself, this section is a problem. The General Assembly, supposedly one of the 3 co-equal branches of government, is being required to report to a body outside of the legislative branch, the "retirement board", which is one of those curious Rhode Island combinations of union members, government lobbyists, and executive branch officials...

36-10.2-3(1) “Retirement board” or “board” means the retirement board of the Employees’ Retirement System of the State of Rhode Island as defined in Chapter 36-8...

36-8-4(a) ...The membership of the retirement board shall consist of:

• The general treasurer or his or her designee who shall be a subordinate within the general treasurer's office;
• The director of administration or his or her designee who shall be a subordinate within the department of administration;
• A representative of the budget office or his or her designee from within the budget office, who shall be appointed by the director of administration;
• The president of the league of cities and towns or his or her designee;
• Two (2) active state employee members of the retirement system or officials from state employee unions to be elected by active state employees;
• Two (2) active teacher members of the retirement system or officials from a teachers union to be elected by active teachers;
• One active municipal employee member of the retirement system or an official from a municipal employees union to be elected by active municipal employees;
• Two (2) retired members of the retirement system to be elected by retired members of the system;
• Four (4) public members, all of whom shall be competent by training or experience in the field of finance, accounting or pensions; two (2) of the public members shall be appointed by the governor...and two (2) of the public members shall be appointed by the general treasurer.

So under the new law, the representatives of the people will have to report to a board which includes members drawn from various private interests. Not good. Then it gets much, much worse. In particular, pay close attention to what the "Default A" plan is, and how it flows through the next sections of the law...

36-10.2-7(3) ...the actuary shall provide to the board, and in the case of MERS plan shall also provide to the impacted local municipality’s legislative governing body, at least five (5) funding improvement strategies but no more than ten (10) funding improvement strategies showing revised benefit structures, revised contribution structures, or both...

36-10.2-7(4) In addition to any funding improvement strategies provided by the board in subparagraph (3), the board shall include a default funding improvement strategy (“Default A”) that shall show increases in employer and employee contributions under the plan necessary to achieve the applicable requirements found in subsection (b), assuming no amendments to reduce future benefit accruals under the plan.

36-10.2-7(5) ...the board shall submit the “Default A” strategy as described in subparagraph (4) and one additional funding improvement strategy, as selected by the board, to the general assembly.

36-10.2-7(6) ...the general assembly shall select and enact into law one of the two (2) submitted funding improvement strategies. If no funding improvement strategy is approved by the general assembly by June 30th, the “Default A” strategy as described in subparagraph (4) shall be enacted into law effective July 1st following the date the plan was certified as being in endangered status under section 36-10.2-6.

Ponder for a moment the meaning of the phrase "shall be enacted" in the context of section (6). Does "shall be enacted" mean the General Assembly members must vote in favor of enacting Default A, if the other plan hasn't been approved by June 30? Or that Default A can automatically become law, without a majority vote of General Assembly members, if the other plan is not approved by June 30? Neither is acceptable in a democratic system.

But there's still more. A new section of the law created by the current bill would spell out exactly what the responsibilities of the members of the "retirement board" are...

36-8-4.1(a) A member of the board shall discharge duties with respect to the retirement system:
(l) Solely in the interest of the participants and beneficiaries...

Thus, to add final insult to injury, the law expressly instructs members of the retirement board to serve only their private interests and not the interests of the public when they use their new power to write legislation that the legislature must pass.

General Treasurer Raimondo has stated on several occasions that she would prefer that the pension bill be passed as initially submitted without amendments. The General Treasurer should publicly modify her position and make an exception for sections of the pension bill that attempt to (unconstitutionally) strip the law-making power of the state legislature and transfer it to a coalition of politically favored special interests.

And what do Rhode Island's Senators and Representatives think about Governor Chafee's latest attempt to remove their free and independent judgment from lawmaking process and let a board not accountable to the public write new laws that they are commanded to enact?

Pension (Half) Reform?

So the pension reform proposal which General Treasurer Raimondo and Governor Chafee have been working on was leaked to the Providence Journal's Kathy Gregg late Thursday. Congrats to Ms. Gregg for landing this scoop. Check out Andrew's post for the projected legislative scheduling of the actual bill (still being finalized), a round-up of recent press coverage and a very good question for the Governor as to process.

The proposal contains some very good elements. It also, however, it contains some unhelpful ones. Perhaps the biggest in this category is that the ball doesn't appear to have been advanced much with regard to that magic moment at which an employee (currently eligible to retire) can retire and start collecting.

... there would be no change for employees eligible to retire by June 30, 2012.

Those at least 52 years old, with at least 10 years of work behind them when the new rules kick in, could retire at age 62. Workers with at least 20 years of service, who were within five years of retirement, would be allowed to retire early, with a reduced benefit.

But for most others, the retirement age would inch up to the Social Security retirement age, which currently stands at 67.

For some groups — such as state and local police and firefighters, judges, correctional officers and nurses at the state hospital — the rules would be different.

For example, state and local police could retire and start collecting a pension at age 55, after 25 years of work. Anyone who left the job with less than 25 years of service would have to wait until he or she reached Social Security retirement age to collect. But there would be an early retirement out for those who were already 45 years old and who had worked at least 10 years when the new rules kicked in. . They would be allowed to retire at age 52.

They would be guaranteed a pension equal to 2 percent of their highest five-year salary average for each year of work, a potential 50 percent at the end of a 25-year career.

Another unhelpful element is that the only adjustment made to current retirees is a suspension of the COLA. This is purportedly temporary, until the pension kitty hits 80% funded. (Many of us are trying without much success to see the "hardship" and "sacrifice" of receiving a defined pension which was generous to begin with and subsequently boosted by COLA's for the last one to thirty plus years, not to mention being collectable at an age that had no relation to the real-world concept of "retirement age".) And when the COLA does return, it would apply to the first $35,000 of pension, not the first $12,000, as had been discussed.

Perhaps these elements explain the most disappointing and alarming aspect of this pension reform proposal. In a separate ProJo article yesterday, we learn that it would result in

a potential $3 billion reduction in the state's $7.3 billion in unfunded pension liability.

So the reform would address less than half of the shortfall?

Am I missing something? How could I be more skeptical of this proposal than the Don of Dubiousness, Tommy Cranston?

Could be better but a good start.

Without reform, payments - on behalf of state employees and teachers only, keep in mind; local pension shortfalls are not included in any of this - to the pension fund will need to rise by $600 million next year and $1.2 billion next (that's the increase only!). With this proposal, wouldn't those increases still be $300 million and $600 million respectively? Is this a shock-and-relief thing? Are we supposed to be happy that they would be cut in half? But that wouldn't solve the very pragmatic problem that, from everything that has been reported, these amounts would be no more affordable than the original amounts.

This is an open solicitation for knowledgable feedback. In other words, please oh please prove me wrong.

For decades, Rhode Island's elected officials made extremely generous promises via a decision process that was remarkably free of the taint of foresight, responsibility, equitability and rational thought of any kind. Simultaneously, they raised our state and local taxes to the fifth highest in the country and committed that revenue elsewhere.

How does this pension reform proposal adequately address the situation?

Pension Preview

Here is a compilation of various media reports on the flurry of activity related to the pension reform legislation which followed from the leak of the basic outline to Katherine Gregg of the Projo. ( Summaries from David Klepper and Scott MacKay).

0. Ted Nesi had this to say after his review of the leaked material...

If you picked up The Providence Journal this morning and were surprised by what you read, you haven’t been paying attention.

The whole issue of the "leak" is a distraction, manufactured by politicians who bizarrely think that getting to participate in backroom deals is an actual perk of their job. (More: Dee DeQuattro).

1. The plan is to be officially announced on Tuesday. (More: Bob Plain, Ian Donnis).

2. There will be a series of public hearings on the bill, so there shouldn't be a see-it-first-on Tuesday afternoon, vote on it Tuesday night situation. David Klepper reports the bill will be over 200 pages in length. No word as of yet if amendments will be introduced and, if they are, how they will be handled. (More: Ian Donnis).

3. The last major delay in drafting the proposal may be due to concerns about whether and/or how locally run pensions will be addressed. The Governor says he wants the local pensions in the bill. The Treasurer is not sure that contractually-negotiated local matters can be handled in the same way as legislatively mandated state pensions. Pension reform advocates say call the GT and the Senate President, and tell them to include the local issues. (More: GoLocal Staff, Paul Edward Parker, Ted Nesi, Ian Donnis).

4. National Education Association Executive Director Robert Walsh has said he doesn't like what's he's seen of the proposal. No word from Governor Chafee on whether he believes that Walsh's public disapproval puts the General Assembly in the position of trying to "end around" the democratic governing process, by trying to pass a law that would not necessarily be approved by a board appointed from the Governor's political allies. (More: Ian Donnis, AP/WJAR).

OK, I'm only 3/4 serious about that last one.

A Welcome Update on Pension Reform

[With apologies for prematurely putting up the rough outline of a beta verison of a draft of this post earlier this morning.]

Yesterday, in a briefing by Deputy Treasurer Mark Dingley to the State Retirement Board, we got more details as to the pension reform plan to be proposed by the Governor and General Treasurer - in particular, the heretofore unclarified issue of how far simply suspending the COLA will get us. If someone hasn't misallocated a decimal point or forgotten to carry the one, it appears to take a decent bite out of the shortfall.

(In depth coverage courtesy WPRI's Ted Nesi.)

It would immediately raise the pension system's funding level from 48% to 62%, [Dingley] said. ...

Under the actuary's proposal, COLAs would be suspended until the system is 80% funded, which could take 12 to 15 years. "So it is a long period of suspension," Dingley said.

The bad news, which we'll get to in a second, is that re-amortization is still on the table. Staying with COLA's, however, the question that I have at this point is, why are we taking so long - twelve to fifteen years, assuming a far from guaranteed 7.5% rate of return - to get to 80% funded? Is this responsible? How will rating agencies view this timeframe? How much does it unnecessarily add to the cost of pension reform?

Now as to reamortization. It needs to be removed altogether from the mix; firstly and principally, because it is like a freshly opened box of chocolates. Delicious and tempting and easy - I'll have just one right now and save the rest for later. Okay, just one more. Ooo, is that a caramel??? Before you know it, the box is empty, reamortization is the bulk of the solution and Rhode Island taxpayers have been forced to gouge on the price of a benefit that at no point was ever reasonable or remotely sustainable.

Which leads us to the second reason reamortization should not be on the table. It is perhaps the largest instance of a recurring budget theme around the state and on Smith Hill: the problem is not lack of revenue but too much spending.

How do we know that revenue is not lacking? The ranking of our tax burden - fifth highest combined state and local taxes.

As for the spending, vis a vis the pension system. The biggest factor of the pension shortfall is not a lack of contributions by employees; not a lack of contribution by the employer (though this is certainly a factor - has anyone from the GA leadership explained why, for over a decade, Rhode Island social programs offered the maximum benefits permitted under federal law?); not an occasionally spotty performance by an investment fund at least partially dependent upon the vagaries of the stock market.

No, by far the biggest contributor to the state's unfunded pension liability has been that the promises made to future retirees were eye-poppingly unrealistic (e.g., retire immediately after twenty years of service [no longer an option but with plenty of retirees grandfathered into the system] and start collecting a defined benefit; amount of pension based upon the final three years of wages which, in turn, were too often jacked up by an excessively generous overtime clause.)

It is there, then, that additional adjustments must be made.

Deputy Treasurer Dingley characterizes this proposal as

a starting point

In fact, from the perspective of retirees and vestees, it should be a nirvana-like ending point. If a suspension of the COLA is the sole sacrifice needed from the retireee to fix the worst pension shortfall in the country, they should be lining up to kiss the General Treasurer's feet.

Don't start that queue just yet, however. For the taxpayer who has never stopped sacrificing, this proposal is just a starting point. We need to start walking back from the fifth highest tax burden nationally. That's never going to happen if 1.) a larger adjustment is not made to current retirees' benefits and 2.) reamortization is not taken off the table and out of the reach of temptation.

About this proposal, Deputy Treasurer Dingley observed,

We received a lot of feedback on this.

Let the feedback continue.

The Pension Performance Is Already Underway

I wanted to go to last night's Publick Occurrences event, but after around 10 hours of motivational speeches and get-rich sales pitches, I just couldn't bring myself to do it. Part of the problem is my suspicion that the game is already set, and like those sales pitches, everything being said right now is just a performance. General Treasurer Gina Raimondo gave Newsmakers a pretty good indication of where leadership is going:

Raimondo signaled a COLA freeze will be a key part of the plan, saying a suspension of the annual increases could reduce the unfunded liability by up to $1 billion, depending on whether the freeze is full or partial and if it continues for "a lengthy time." That would be the most significant change for current retirees. ...

The third major plank expected in the Raimondo-Chafee proposal: reamortization, or stretching out the schedule for paying down the unfunded liability, which raises its long-term cost. The treasurer has criticized reamortization in the past as inadequate, but said Friday she can support it if it's tied to other changes. ...

One policy Raimondo doesn’t support: raising the retirement age for state workers who are already eligible to retire, which she said could result in a rush to the exits before the new plan takes effect.

The game is up. (The "second plank" was a hybrid plan moving forward.) We're looking at a $7-9 billion shortfall. $1 billion will come from a little temporary tweaking of COLAs, and the rest will fall to reamortization, which only increases the burden down the road, and there's still a probability that all of the "fairness" and "spreading the pain" talk indicates additional tax increases, beyond what's already been pushed down to towns and cities by lowering the expected rate of return on pension investments.

Plainly put, the people running the show in Rhode Island aren't willing to avoid yet another bad long-term repair to the problems they've created by making the changes that have to be made for pensioners across the board. So, they're pretending that a temporarily suspended annual adjustment (in a continuously bad economy) is the end of the world.

That's why legislators are making such a big deal about "doing the right thing" and voting to reduce the pensions that so many of them and their families are receiving or will receive: Because it's not nearly enough of a reduction in total benefits, and in a sense, they're negotiating the public down.

John Ward: Pension Costs Must Be Reduced

(Following are the prepared remarks of Mr. Ward at the Publick Occurrences Forum, "Pension Puzzle: What Can We Afford?" of this evening.)

My thanks to the Providence Journal, Leadership Rhode Island and Rhode Island College for allowing me the honor of participating in this forum.

There was an advertisement in yesterday’s Providence Journal placed by a new group named Engage Rhode Island. In their ad, they say, “Without reform, our taxes will rise, school funding will be slashed, social services will be dropped and more jobs will be lost.” What an understatement!

I can’t speak for the rest of Rhode Island, but in Woonsocket, as a result of the state budget cuts, we have already seen our taxes rise by 29% in the last four years as a direct result of the elimination of $3.3 million of general revenue sharing, the reversal of the motor vehicle excise tax phase-out to the tune of $5 million and $4.4 million in reduced education aid. That’s a revenue loss of $12.7 million. Our levy increases have now completely offset the lost state aid, but we are in no way out of the woods. The additional burden of $3.6 million for municipal, police and fire pensions as has been projected will push us over the fiscal cliff! Period, not debatable!

As for the other points in the ad, you have already heard about how state cuts will affect social services? In Woonsocket, our local support for social services vanished long ago. The local operating budget doesn’t include any social service funding worthy of note. Three years ago, we had to eliminate our summer parks programs entirely! We simply couldn’t afford it. But more than that, we have had to charge each household $96 per year to offset the rising cost of trash collection and half of our street lights are out! That’s what I call cuts in services.
They say jobs will be lost? Our public safety staffing has been reduced by 10% since 2008 and the rest of the city staffing has been cut by 24%, yet our savings have been offset by deficits resulting from mid-year state aid cuts and suffocating increases in health care and pension costs. The jobs left to be lost are in the private sector because the state is driving up our property tax burden.

Finally, they say school spending will be slashed. It should say school spending will be slashed again!

Since FY2003, Woonsocket has seen the cost of teacher retirements increase by 138%. Now we are told that unless we reform the pension system, we can expect to have to pay an additional $2.3 million. That would put the ten year increase at triple what it was back then.

Since 2003, Woonsocket’s student population has decreased by about 10.5%, not unlike most other communities in Rhode Island. However, for Woonsocket, the number of teachers has been cut by over 20%, teacher aides more than 38%, facilities and clerical staff by 17% due to the lack of funding from the state. You see, contrary to the misinformation around the state house, the local funding for education in Woonsocket has increased by 16 ¼% over that time while state education aid has risen and then been reduced to the same level as it was back in 2003. When the city issued $10.5 million of deficit bonds last year, $6.5 million was due to school department deficits caused by mid-year state aid cuts and the extreme increases in pension and health care costs.

So what we have done without? All day kindergarten has been eliminated, making Woonsocket the only urban school district without all-day K. There has been almost no capital spending, much of our technology has become obsolete; there has been almost no spending on textbooks or their equivalent. Our class sizes throughout the district are at, or beyond, the maximum allowed by the contract. Quite frankly, I think a careful assessment of our current offerings would find Woonsocket in violation of the new BEP.

To allow the pension system to remain largely unchanged will make it impossible for Woonsocket, and every other urban community to survive. We have no time for half measures. We need a complete, permanent pension reform that will not only eliminate the projected increase in our pension burden, but it must reduce pension costs so our extremely limited resources can be used to bring back critically important municipal services and educational programs for our children.

Continue reading "John Ward: Pension Costs Must Be Reduced"

How Much Time Will There Be To Read the Pension Bill, Before Voting on the Pension Bill?

At the John Loughlin fundraiser held in East Providence on Sunday evening, I was able to ask several of the sitting legislators in attendance about the highly anticipated special legislative session on pension reform. In particular, I asked House Minority Leader Brian Newberry and Senators Frank Maher and Nick Kettle about how much time they expected to have between being presented with a complete pension reform plan and being asked to vote on it.

Each of the legislators that I talked to had detailed and pointed thoughts on this issue...

 

Representative Brian Newberry: What I've been hearing is that's there are some tensions between the leadership on perhaps both the House and Senate sides and the Treasurer's office as to what's going to happen. As I understand it, the Democratic leadership wants the Treasurer to propose a solution that is actuarially sound, in a complete package. My understanding is the Treasurer's office -- and this goes back many months -- had wanted really to come forth with a slew of potential options and allow the legislature to choose from them. You can see the political advantages to both sides for that.	Audio: 1m 9 sec
To get something passed realistically, one of the things that will happen, no matter what gets proposed, is that there will be a series of floor amendments. There always is, on something of this magnitude. And if I were the Democratic leadership, I'd want something where I could come forward and say 'listen, this is the solution'. 'If you change it, and you don't have actuarial support for your changes, that's going to completely alter the equation and mess up the entire solution'. I suspect what we're going to ultimately see --and I don't have any knowledge if it's going to happen one way or the other -- but I think we're going to see the Treasurer's office put forward a solution, and whether it's a real solution or not we'll have to analyze, but they're going to put forward a package and ask the legislature to pass the package intact. I suspect that's what's going to happen.
Senator Frank Maher: That's a good question. That was one of the very concerns I had had a couple of weeks ago, when the House and the Senate got together for a pension briefing that was put on by leadership. I proposed the question of how exactly was this pension reform going to be given to us, and we were told it was going to be given to us in a legislative bill per se. When I asked who was going to be the sponsor of that bill, the reply that I received was "we don't know". And I said is it going to originate in the House or the Senate? And they said "we don't know". And I said, the Senate being the upper chamber, are we going to have the final say, depending on where the bill originates, of what the final proposal will be, taking into consideration the ideas that are given to us by the General Treasurer and the actuaries that are working with her? Once again, the response was "I don't know".	Audio: 2m 14 sec
So at this point, I am very concerned about not only how the pension reform is going to be put together in a legislative package and given to us, but I'm also very concerned, especially being part of the minority party, that we may not know until literally the last minute, and be told to vote on a bill that could literally be hundreds of pages long. And the example I give to reference that is not so much the budget but going back to when we had the Deepwater issue. That bill was a very, very extensive, complicated piece of legislation, and it came down to the last day of the vote. We were literally voting on floor amendments with no PA system working in the chamber, and being told we had to make a decision right then and there as to whether we were going to support it or not support it.
So I think that everybody agrees at this point that we have to have pension reform. I've been told that the Senate leadership is on board with pension reform one-hundred percent. But I hope that the political will is there to 1) do it comprehensively and 2) make sure that we're given enough time to digest and realize exactly what the ramifications are going to be once they decide the form that the legislation is going to take and how it's going to be passed.
Senator Nick Kettle: Echoing the same concerns as Senator Maher, I believe that we are not going to be given a proper amount of time to review the bill as it will be very extensive, and we won't know the full ramifications and implications for all the state workers and the taxpayers. And it's the taxpayers who we need to know how this is going to impact them. Unfortunately, the unions and the state workers are going to have to start paying their fair share. I don't know if the political will is in either chamber to actually do comprehensive pension reform, and I'm afraid that within two or three years, we're going to be back doing the same thing again. So I want to see pension reform happen this once, as Gina Raimondo has promised, and that's it, never come back to this issue again. It needs to be comprehensive, but unfortunately I don't see the will right now to do it.	Audio: 49 sec

Victory for the Unions?

This morning, Superior Court Judge Sarah Taft-Carter ruled against a summary judgement for the state and said there is an implied contract between the state and the unions with regard to their pensions. It seems the state was seeking to get a Council 94 lawsuit thrown out, via summary judgement, saying that because the pensions are not collectively bargained, there is no contract and as such, the state can do what it chooses with regard to the pension program. Not so fast says the judge:

Defendants envision an ERSRI [the Employees Retirement System of Rhode Island] under which the State may, with or without justification, significantly alter or completely terminate a public employee’s pension benefits at any time – even just one day – before retirement. In light of the major purposes underlying public pensions, as recognized by our own Supreme Court, such a construction of the ERSRI is untenable. …

The case law does not preclude but rather supports this Court’s holding that Plaintiffs, as ten-year veterans of the State, possess a contractual relationship with the State pertaining to retirement allowances and COLA benefits which are not subject to collective bargaining.

The full 39 page ruling is available thanks to Ted Nesi on his blog. As this ruling just came out in the last hour or so and I haven't read it yet, I'm not going to pretend to know much more about it yet. But this sure sounds like there's another huge hurdle for Gina Raimondo and the General Assembly to clear before they can make any huge changes.
I'm sure more details and discussion will be forthcoming.

Earned Benefits, Core Benefits, and COLAs

Ian Donnis of WRNI radio's (1290AM) On Politics Blog reports on a potentially interesting quote from Rhode Island General Treasurer Gina Raimondo regarding the broad parameters of a pension reform proposal...

State Treasurer Gina Raimondo’s pension briefing to the state Senate was nearing its conclusion this afternoon when she dropped a mini-bombshell in response to a lawmaker’s question: she hopes to fix the state’s pension crisis without cutting the earned benefits of public employees.

The exact meaning of the above hinges on the meaning of "earned benefits", which is a term that I do not believe has a precise legal or actuarial definition. However, in response to a question asked by a retired teacher at last week's Scituate Democratic Town Committee pension forum, Treasurer Raimondo referred to not cutting "core benefits" of retirees at the same time she was saying that cost-of-living increases might be trimmed (Audio here)...

If something happens to the COLA, and I don't know if it will, as you know the core benefit won't go down, it might just be an adjustment to how much it goes up.

...i.e. the COLA was not being considered part of the "core benefits". If "earned benefits" as the same thing as or closely related to "core benefits", it is possible that the reference to "earned benefits" does not remove from the proverbial table 1) changes to COLAs for everyone, or 2) changes to not-yet retired employees, who haven't yet put it in all of the time necessary to "earn" their benefits.

It seems to be an unavoidable consequence of the politics of the pension debate that money will be divided up in less-than-obvious ways for the purposes of public discussion.

From the End of the Pension Study Commission, On To???

Ted Nesi of WPRI-TV (CBS 12) has a review of today's final meeting of "the Chafee-Raimondo pension advisory group", which doubles as a preview for the General Assembly's upcoming session that is supposed to meaningfully tackle the states' pension issue. One theme that seems to be emerging is that reamortization is being considered, in conjunction with some other reforms...

• One of Newton’s slides offered a menu of six options for dealing with the pension funding issue, with varying mixes of reamortizations, COLA freezes, state taxpayer contributions, and transitions to partial 401k-style plans. They’d get the state to 80% funding between 2024 and 2029 at a total cost to state taxpayers of $3.94 billion to $4.99 billion depending on which options are chosen.
   
  
• Even the cheapest options laid out by actuary Newton aren’t cheap. One alternative he set up gets to 80% funding by 2024 at a 25-year cost to taxpayers of $3.94 billion; another gets there by 2029 at a 25-year cost of $4.99 billion. Reamortization hawks pointed to that as evidence for why further delay in shoring up the fund is so costly, but supporters said the annual contribution has to be affordable to taxpayers.

The Scituate Pension Forum

The Scituate Democratic Town Committee held a forum on Wednesday evening, where Rhode Island General Treasurer Gina Raimondo, current Pension Commission member (and Scituate Resident) Ernest Almonte and State Representative Michael Marcello answered questions about pension reform. They didn't discuss specific proposals that might go before the legislature next month, but Treasurer Raimondo did say at one point during the event that she anticipates litigation to result, suggesting that she expects the eventual implementation of something more than a minimal plan for reamortization and new rules for new hires.

Of course, the recommendations of the State Treasurer as well as the output of the pension commission are strictly advisory; the final decision about what type or pension reform occurs (or not) rests with the legislature and the Governor. For his part, Rep. Marcello said he would like to see a real solution that doesn’t require continuing adjustment to be achieved this fall.

You can hear for yourself excerpts of what the panel members said, by clicking the audio links below.

---

Setting up the problem in big-picture terms...

Ernest Almonte: "In a business, if you have a pension fund that's less than 80% funded, there are additional requirements that are put in place. You can't give additional benefits to the employees or the retirees...let's look at our town [Scituate]; it's about 24% funded..."	Audio 49 sec
"The Federal Government has severe financial problems. They are going to have to fix their problems, which means there's going to be less money for states and cities and towns to solve their problems, and they're not in the mood to solve state problems...We're going to have to solve the problem ourselves..."	Audio 1m 6 sec

Response to a question about whether the current crisis is the result of the state not making it's legally required contributions...

Gina Raimondo, "The state has made it's annual contribution every year, [with the exception of] a couple of years in the early 90s during the DEPCO crisis...that is less than 1% of the problem..."

Audio 33 sec

The next several items are responses to different versions of the question asked by several audience members of why teachers and state workers should have to experience any significant changes in their pensions, when they contributed according to the schedules they were given and made long-term plans based on payouts they were promised...

Gina Raimondo: "We can't keep pretending we don't have a problem, or keep pretending that the math is better than it is. This state started this system in the 1930s. It did not do an actuarial study until the late 80s..."	Audio 2m 4 sec
"Average wage in Rhode Island is $41,000. Unemployment is still extremely high. Taxes, in my view, are about as high as they can go....Comprehensive pension reform is in everyone's interest. If you are a taxpayer, you need to get behind this. If you are a teacher who is working hard every day to educate our children and serving our community, you need to get behind this. Because it is in no one's best interest to have a plan that runs out of money or to have more bankruptcies in this state..."	Audio 1m 40 sec
"...10 cents of every tax dollar goes into the pension. That is double what it was in 2003. It's going to double again in the next six years if we don't fix it and continue to go up from there. So the taxpayer is sharing in this burden, and will continue to share, as they should..."	Audio 3m 19 sec
Ernest Almonte: "One thing I want to add to the teachers...You taught us all so well, we figured out that the numbers don't work...and you also taught us that we should look out into the future and not just solve things for today..."	Audio 1m 48 sec
Michael Marcello: "I know there are state workers who are hard workers and who do a good job. Unfortunately, the benefits you were promised were not funded they way they should have been...this is not the fault of state workers. They did everything they were asked to do, but the contributions that you are putting in are flat...and we are literally out of money, and I fear if we do not correct it within a year or two years, the problem will only get bigger..."	Audio 1m 34 sec

Response to a question about pension-related lawsuits...

Gina Raimondo, "There is pending litigation...I expect that with almost any reform we enact, there will be some form of litigation. It's not a reason not to go for this...It is the state's position that there is no contract and therefore, legislation can be enacted..."

Audio 1m 34 sec

Response to a question about state pensioners taking other government jobs...

Michael Marcello, "My personal preference is that if you have a state pension and you go to work for a municipality, you should be put into a different type of system..."

Audio 1m 28 sec

A Statement and Prediction

Rhode Island lawmakers heard the following when they gathered for a preliminary shindig related to pensions:

On Tuesday, [pension activist Diane Oakley, executive director of the National Institute on Retirement Security,] gave the lawmakers more reasons to think twice about defined-contribution plans: "If investment losses cannot be recouped by retirement age, they may delay plans or retire with much less income."

To which the only rational response is: So? As presented, the statement makes no mention of the health or occupation of the potential retiree, and therefore exposes the vacuity of moral statements made about public-sector pensions in broad strokes. If a perfectly healthy 48-year-old first grade teacher has to put off retirement, well, dems da breaks.

That's the situation the rest of us face, and to treat it as some sort of unlivable state beyond the boundaries of ethics to impose is to reveal what many of us suspect about those inside of government: They truly believe — whether it's something they'll allow in their consciousness or not — that they are a chosen people set apart. To the extent that they can leverage political donations and activism to force policies to remain in their favor, they can claim insulation from the realities of our shared economy.

Reading the rest of the article, and having experience with Rhode Island's governance methodology, one can set the baseline expectation for the coming "reform" as reamortization with some sort of tax increase (perhaps pushed through local governments and property taxes) and a mild reduction in benefit levels for future retirees — such as an additional year or two before they can retire or a couple more years of salary folded into the calculation for benefit amount.

I'd like to be wrong, but I'm just not hearing contrary noises.

Who Pays for Past Mistakes

Generational warfare: It's bound to happen here in Rhode Island with the pension crisis. It's also happening nationally on the budget deficit debate with the new Super Congressional panel set to convene. Education Policy wonk Rick Hess offers his perspective:

You're either with the kids or with those rushing to the ramparts to defend retiree entitlements. So, which is it?

Consider the President's vague calls last week to spend billions more on school construction and preserving school staffing levels (which would've been more compelling if he had offered any inkling as to how we might pay for it). Obama finds himself unable to do more than offer marginal, dead-on-arrival programs because the feds have spent more than half the budget just mailing checks to retirees, covering health care bills, and paying interest on the accumulated debt. Everything else—schools, financial aid, the FBI, defense, transportation, the environment, NASA, foreign aid, you name it—has to make do with what's left.

As Julia Isaacs at the Brookings Institution has pointed out, the federal government now spends about $7 on seniors for every $1 it spends on children....Do we really think it's a good idea to spend half of all non-interest spending on making retirement ever more comfy?

Past or future? Which will it be? He provides an important breakdown of we pay for current Medicare spending:

[T]oday's retirees have contributed taxes that amount to less than half their Medicare outlays. Today's Medicare payroll tax doesn't fund Medicare--it funds only Part A (hospital expenses). Premiums cover just 25 percent of Part B (doctor treatments and visits). And premiums for Bush's Medicare drug program (Part D) cover just 10 percent of the cost. The rest of the hundreds of billions in outlays for these programs is vacuumed out of general revenue. (See here for a good breakdown on Medicare funding.)

And Social Security:

Social Security has the government reflexively spending hundreds of billions to mail out monthly checks to the wealthiest segment of the population, without an ounce of thought as to whether that's the best use of borrowed funds (the famed Social Security "trust fund" being, you know, nonexistent). The Social Security Administration reports that more than 20 percent of those 65+ have incomes over $65,000 a year. In a nation where median household income is in the $40,000s, is it really radical to rethink how much we mail to these households every month?

As for taxes:

Toss in all of the tax deductions that President Obama called for eliminating this summer, including the corporate jet deal, and you address another $400 billion over 10 years, or less than 2 percent of the shortfall. So, just keeping the deficit from exploding will involve all those taxes and trillions more in cuts. Those demanding substantial new spending then need to raise hundreds of billions beyond that, through additional cuts or tax increases....Even with hefty tax increases, protecting existing entitlements ensures that we won't have much available for schools, colleges, or anything else.

He urges education advocates to step up to the plate and take on the AARP and similar groups so that more money can go towards kids and education.

In short, it's possible to get our house in order, free up dollars for schooling, and shift dollars towards youth. But doing so requires facing down the massive, intimidating seniors' lobby.

Shared sacrifice involves asking Baby Boomers and retirees to step up and, you know, sacrifice. It doesn't mean holding harmless the generations who voted themselves free stuff through the good times and doesn't rely almost entirely on raising taxes and curtailing benefits for the under-40 set.

Hess' bailiwick is education and his goal is to increase funding for it. Regardless of whether you agree or disagree with Hess' priorities, his argument helps to lay out the choice that needs to be made: should the people who benefited or made the mistakes in the past be held most accountable for those mistakes? Or should their kids and grandkids?

AARP as Full Subsidiary of Democrat-Union-Progressive Alliance

Given the popular impression of the AARP, I'd wager that this activity would strike most people as a bit like AAA advocating against a fuel allowance for state workers:

The hand-wringing over Rhode Island's pension crisis has the state chapter of the AARP so worried it has taken out a half-page newspaper ad and booked a radio spot to warn past and present government employees of what is at stake for them in the discussions about to get under way at the State House.

The ads have been timed to run on the Tuesday that state lawmakers are headed back to Smith Hill for the first time since June for a briefing on the $9.4-billion pension-funding gap that threatens to bring the state — and many of its cities and towns — to the breaking point.

Framed as an open letter from the AARP's state director, Kathleen Connell, to Governor Chafee, the newspaper ad draws attention to the "looming threat" that some of the options discussed in recent months by a pension-advisory group pose to "retirees' economic security."

Given the strong union involvement in the pension discussion, perhaps the AARP wishes to lay the groundwork to address surprise developments. Any result that harms taxpayers will be just dandy; any result that changes the terms of public-sector retirements will be the result of shady, non-transparent manipulation.

It's interesting to note that — although the letter/ad tries to raise public-sector pensions to the status of a symbol and beacon for all retirees — AARP Rhode Island expresses no concern whatsoever about the well-being of retirees and future retirees who must pay for those pensions, even as fixed incomes give way to increases in taxes across the board.

One can imagine a strategy meeting of the Rhode Island Left-union alliance at which the AARP was advised to focus on "transparency" and other neutral good-government aspects of the pension-reform process so as not to seem too partisan. Ms. Connel didn't pull it off.

Apparently, it would be a travesty to require Bob the public worker to put in a few more years of work and to have to budget based on a dollar amount that doesn't automatically climb beyond inflation every year. Yet, if Beth the widow from the private sector, has to add a decade of work to her plans or, if she's already retired on a fixed income, to sell her house because the taxes and cost of living leave inadequate resources to eat, she doesn't make the cut for the AARP Rhode Island's vision of "retirement security."

Walter Russell Mead on the Collapse of Rhode Island

Walter Russell Mead of The American Interest offers an outsider's no-holds-barred view of Rhode Island's current fiscal condition. A few of the more evocative passages are excerpted below...

[T]he state could never afford the beautiful utopia it was crafting, and so politicians and union leaders chose the path of systemic deceit. Taxpayers weren’t told what the bill for the system would be; public service workers weren’t told that the pension guarantees they’d been sold were worthless because taxpayers would not and could not foot the bill.

An economic crisis is nature’s revenge on those who make and those who accept false promises; it is a holocaust of lies when the dross is burned away and only what is real and true remains. Think of cotton candy melting and charring in the flame of a blowtorch; that is what is happening to the secure retirements that “caring” blue politicians and “committed” blue union leaders promised gullible state workers...

As far as I can tell the union leaders and politicians who concocted this disaster between them have no plans to suffer any cuts in their own pay or pension plans — and intend to go on “serving the public” without any accountability at all.

...and Professor Mead offers an implicit question at the end of this next section that Rhode Islanders may have a thought or two on...

Nationally, state and local government face something like $3 trillion in accumulated lies and deceit; tiny Rhode Island has the highest per capita amount of systemic dishonesty on its books — I don’t know if the Ocean State is unusually rich in both knaves and fools or if some other factor is at work.

For readers interested in what Prof. Mead means by references to “'caring' blue politicians", "'committed' blue union leaders", and a "blue paradise built on lies", his concept of the blue social model is explained here.

An Accidental Disability Pension for Leukemia?

I appreciate firefighters for the job they do. I have friends who are firefighters on various departments around the state and I try to ask them lots of questions to better understand their job. I can also appreciate the fact that it is a job that can lead to permanent disability through injuries sustained on the job. I could even buy that the job can lead to certain types of cancer, lung cancer not the least of which. However, I do wonder about leukemia as a result of being on the job. Former Providence Fire Chief George Farrell was awarded a full tax-free disability pension by the Providence Pension Board as a result of his leukemia.
The vote to award the tax-free pension was 5-4, as the board debated their own rules.

The city Law Department opined that in order for Farrell to receive an accidental-disability pension, three physicians must agree that the leukemia, which at last word was in remission, renders him totally and permanently disabled from doing the job of fire chief. One of the three physicians who examined Farrell said he could return to work on medication.

I don't understand what's not clear about "three physicians must agree". One disagreed, so isn't that enough to disqualify the claim? The article doesn't explicitly state it, but based on a comment from one pension board member, it would appear that the board's lawyer also believes the doctors must be unanimous.

"We totally disregarded our attorney," Hull complained.

The other part that is curious to me is just in the title of this pension, it is an "accidental disability pension". That says to me that the claim must be based on some accidental event. I don't know that leukemia is caused by such a thing. This type of pension should be awarded when the injury is a direct result of being on the job.

As a side note, the chief was already receiving a standard pension and filed a claim for the accidental disability pension, possibly in part because it comes with a better health care plan. That is an understandable desire for someone with cancer, and I do hope Mr. Farrell makes a full recovery from the disease.

NP School Committee Doesn't Understand the Pension Mess?

While this doesn't rise to the level of corruption recently seen in North Providence, one has to be left wondering if the North Providence School Committee "gets it". Time and time again, we see where local school committees and town councils will negotiate contracts that are just unsustainable and unaffordable in the future. In North Providence, they might have done it again.
The assistant superintendent left to assume the top role in Woonsocket leaving the city without an assistant. So Superintendent Donna Ottaviano stepped up and offered to do the job, along with her own duties:

(Committee member Gina) Picard said that Ottaviano at first suggested that she be paid $50,000 for the work, but was met by opposition mainly from Picard.

Eventually, the two sides agreed that the compensation should be an additional $35,000 on top of her current $123,000 salary. On the face of it, it sounds like a great idea. Pay $35,000 for someone to do a job that previously cost $98,000 a year. Except there's this issue of a pension system that we're all dealing with and this one deal would make things worse.

a move that potentially boosted her pension by more than $18,600 a year, or nearly $500,000 over the next 20 years with cost-of-living adjustments.

Mayor Lombardi and the rest of the School Committee heard so many complaints from the town's taxpayers, that the committee reconvened Tuesday night and backed off the deal, deciding instead to hire an assistant superintendent, part-time.

What happened to due diligence? Don't most towns have a Finance Director who knows with some research what the financial impact is of every move, every contract signing? If so, was this done? If so, did the committee not care?
The latter is possible:

[Chairman Anthony Marciano] discounted the $487,000 pension boost that the pay hike would give Ottaviano. "I don't think you can really say that because the pensions are very precarious right now. I don't think you can say that, because the General Assembly is working on coming up with something different," said Marciano, a former state senator.

So just sign the contracts and hope that the General Assembly fixes it later. That's leadership?

Yes, North Providence, this is who you elected.

Woonsocket School Dept's Balanced Budget: Savoring the Good Times - However Fleeting in the Absence of Pension Reform

[Note: In the article excerpted below, the Woonsocket Call, bless them, is using the term "pension reform" erroneously. What they are referencing is the "proposed increase of employer pension contribution".]

[Note II: In the note above, the word "employer" is used as it has widely has in the indicated phrase. While technically correct, it is, in this context, a euphemism. A more accurate term would be "state and city" or, to be completely precise, "taxpayer". Thus: "proposed increase of pension contribution from the taxpayer". Thank you. There will be no further Notes before the start of this post.]

As a semi-regular critic of Woonsocket's (and other cities') seeming refusal to bring their budgets, school and municipal, into line with their revenue, I'd like to be one of the first to applaud Woonsocket's recent achievement.

The School Department finished its 2010-2011 budget with a $157,000 surplus

A surplus! Very nice. So that means that we're getting FYN (Fiscal Year Next) off to a good start, right? Right???

... but doesn’t appear to be on track for a similar outcome next year thanks to state plans for pension reform, according to school officials.

School Department Business Manager Stacey Busby was worried enough about the proposed pension changes, in fact, to give the School Committee the bad news along with her favorable report on the close out of the 2010-11 budget Wednesday night.

Ah. We would be off to a good start except for the higher pension contributions necessitated by the recent adjustment downward of the rate of return on pension fund investments.

While the rate of return had to be adjusted, it's dismaying that the Woonsocket School Committee finally gets their budet in line after considerable effort only to have the chair kicked out from under them next year. Woonsocket taxpayers are looking at a 10% increase in their tax levy just to cover this increase in pension contribution.

And of course, Woonsocket is far from the only municipality facing this situation.

At some point, it becomes difficult, to say the least, to responsibly budget for the astronomical promises carelessly made by someone else.

The Thought of Too Few

In a letter to the Providence Journal that doesn't appear to be online, Karin Gorman expresses a feeling that many of us share:

Things became heated [at a recent Operation Clean Government event] when state Rep. Larry Valencia, former president of [the organization], suggested that everyone needs to come to the table to solve the pension problem and increase taxes.

This was a room full of people who actually pay attention. We are tired of hearing that. That statement upset just about everyone in the room. There's been enough talking. Now is the time for action

And that action is not raising taxes, fees, and fines on an over-taxed-feed-and-fined population. Unfortunately, it's difficult to escape the conclusion that not enough of us feel this way to overcome the apathy and vested interests of everybody else.

Sharing the Pain Means You Hurt and They Have to Reduce Their Massages

Somehow, I think we all expect Rhode Island to pursue the sort of inadequate solution to the pension crisis that consultant Joseph Newton described to the union-heavy pension advisory panel. Consider:

Cost-of-living adjustments, instead of being based on a commonly used measure of inflation, would be based on how well the pension fund's investments perform. As an example, if the fund met its target of a 7.5-percent return, retirees would get a 2-percent adjustment. If the fund didn't meet the 7.5 percent, the adjustment would be lower, Newton said. On the other side, if the fund did better than 7.5 percent, retirees would get an adjustment higher than 2 percent. This would align how much the government pays with how much it has in the pension fund.

It's like Bugs Bunny counting out "one for you, one for me; two for you, one, two for more." The pension system outperforms the necessary returns one year, beneficiaries get more money; it underperforms, beneficiaries get more money. But this is the best part of Newton's suggestion:

... it might take 15 years to reach a point where the contribution levels he outlined could be implemented. As an example, the taxpayers might have to kick in 23 percent of an employee's salary during that time to help pay off the unfunded liability. And retirees might be asked to do without cost-of-living adjustments for the same amount of time.

For fifteen years, we'd collectively be paying $16,100 toward the pension of a $70,000 per year teacher. That's a quarter of a million dollars per teacher, and teachers aren't the only pension recipients. On the other side, the "shared pain" is no automatic annual increase.

And when it turns out, in fifteen years, that investments didn't do as well as necessary, or some other mismanagement by the government affected the amount of money on hand? There'll only be more pain to share.

Charlie Hall's Portraits of Perspicacity

Courtesy Ocean State Follies

The Overriding Point on Pensions

Retired Cranston police captain Robert Barber feels very strongly that his pension should not be modified one bit:

The mayors are asking the people who sacrificed their bodies, families and health for the service of the community to sacrifice more. Statistically, law-enforcement officers die 10 years earlier than the general population. The mayors are asking me to sacrifice my source of income. I will not collect Social Security because I did not pay into it. In a few short years I will be forced to enroll in Medicare. For 27 years, I was called away from family functions, vacations and holidays, 24/7 to fulfill my contract. I did so proudly and gladly. When the economy was booming, I went without a raise for four years and worked without a contract. At my age, how will I make up the difference the mayors want me to give up?

Counterpoints could be made, line by line. I suspect, for example, that the mortality statistics for law-enforcement officers who reach retirement are not so dramatically different from the average. It is a dangerous job, and every officer who dies young for job-specific reasons skews the numbers. As for being on call, a great many careers, particularly those of business owners, require adjustment to personal activities.

The major hang-up, once again, enters with the question with which Barber ends the paragraph: at his age. According to the bio line at the end of his essay, Mr. Barber is 58 and has been retired for eight years already. In other words, he still has four years to go until he reaches the general population's average retirement age, at which point he'll have been retired for 12 years.

It's important to note that Barber highlights a number of other areas of public expense that also should be trimmed in order to advance our state's economic health:

The article also lists 37 names [of legislative employees], and the lowest raise was 10 percent. Aren't the legislators also getting a raise? In the June 26 "PolitFact" acticle, Gary Sasse says Rhode Island spends 52 percent more per capita on human-service programs than the U.S. average. Rhode Island is spending this much more than the rest of the nation on entitlements, mostly for people who don't work, while taking money away from public servants who served honorably for decades.

Be that as it may, Mr. Barber may have to file his threatened lawsuit, because public sympathy is clearly waning for young retirees from the public sector, and perspectives are not what they once were. Nowhere is this more sharply drawn than his closing words. He writes that he's "being vilified because [he] worked hard and planned well." To my knowledge, there's no reason to question his hard work, but choosing a public-sector job under the protection of the union structure that dominates the state does not amount to a feat of financial planning justifying a near-midlife retirement.

Retirement Security for Them, Not You

In a nutshell, my take on General Treasurer Gina Raimondo is that she's free to take the politically risky steps of pushing pension reform because she ultimately lacks the power to implement it; that will fall to the General Assembly and the governor. The far left in the state was tickled by her election and is surely looking forward to her ascension to higher office, where she'll have more influence on everything from abortion to welfare to public-sector labor policy.

But first she's got to thread this pension needle — forcing some hard decisions, to win the general-public tag of "courageous," while giving the left-Democrat-labor set no reason to write her out of its book of allies. That's what came to mind when PolitiFact took a look at her aversion to 401(k)s:

During an appearance on the July 10 edition of 10 News Conference, when reporter Jim Taricani asked her about the sustainability of the current system, she pointed out that without a pension program, most people are ill-equipped to deal with the financial challenge of retirement.

The state's pension program, she said, "is clearly crushing the state with a debt we can't afford and that's why we have to fix it. It really is a crisis. Having said that, the average 401(k) in America of a person who's 60 years old is under $100,000, so that isn't retirement security either. I think we can maintain an element of defined benefit, an old-fashioned pension plan, but design it in a way that is sustainable and affordable."

Frankly, I'd have preferred if PolitiFact had utilized the time of its paid journalists to research evidence of whether it's possible to design an affordable system, mainly by investigating the existence and financial health of defined-pension plans outside of the government sphere. Instead, they researched the 401(k) citation and found Raimondo to be, if anything, optimistic.

I'm not persuaded that 401(k) balances are an accurate summation of non-defined-benefit retirements. Of the retirees whose finances I know well enough to comment, none rely on such accounts, or even on IRAs. Rather, they've got regular savings, other sorts of investments, profits from home sales, and such sources of income as life-insurance payouts. None of that is captured in Raimondo's point that there is no secure retirement outside of defined benefits.

Moreover, the average or median 401(k) balance tells us nothing about the average that the an employee would have on a new government defined-contribution program. I'm skeptical that it's possible to design a self-sustainable retirement system that makes promises about the dollar amount that a retiree will receive when both the investment returns and the longevity of the employee are unknowns. On the other hand, it would certainly be possible to design a defined contribution program that generates the coveted security — with the main difference being that it's the responsibility of the retiree to see that the money lasts his or her entire life, not of the taxpayer.

That gets to the broader question: Let's say that Treasurer Raimondo is entirely correct in her insinuation that the average person is ill prepared to retire:

Her spokeswoman, Joy Fox, argued that because the savings rate is under $100,000, Raimondo’s statement would be True, even if the actual number was tens of thousands lower.

Fox also said Raimondo's larger point is that "given how little the average 401(k) was worth, the defined contribution system did not provide retirement security" for state workers who, in the treasurer's words, "at the end of a hardworking career . . . ought to have security in retirement."

Why ought it be a first principle that a population that is ill prepared for its own retirements must guarantee those of government employees? By all means, within the bounds of available resources, include retirement contributions in public-sector benefit packages, but don't demand that they be almost unique in the world of American employment in offering come-Hell-or-high-water security.

Who Is Talking About Fairness

I'm beginning to wonder whether all of the stories are like this or whether there's some other reason so many of the people who step forward to be faces of the pension crisis seem unlikely to evoke sympathy. Here's one from the hearing at which Central Falls Receiver Robert Flanders asked public-sector pensioners to agree to a cut in their benefits:

Michael Long, a retired police sergeant who said he suffered a neck injury when he was run over during a shooting, got a big round of applause and later a standing ovation when he asked Flanders, "Where is the fairness?"

Long, now a practicing lawyer, said that the retirees are being asked to surrender up to $20,000 of their pensions that are in the $35,000 to $40,000 range. Bankruptcy, he suggested, might be a better option.

"We will take our chances," he said.

Well might Long take the risk of bankruptcy, considering that he's got another income as a lawyer. According to this posting Long was on the force for just eleven years, and as reported in the New York Times, he's 54 and lives in Attleboro, Massachusetts.

A reasonable guess would be that Long has already collected his pension for about twenty years, perhaps twice the number of years that he worked as a police officer. Justifiably, he used the resources offered to build a new career as a lawyer (and moved or remained outside of the punitive state from which his pension is drawn). So where's the fairness for the Rhode Islander who cannot find work and has no tax-free disability pension to support a change of occupation? Where's the fairness for those who expect never to be able to retire at all thanks to the government albatross dangling from the economy's neck?

Crediting the Good, While Debiting the Bad

It's come up in the comment sections, but I've been meaning to comment on Michael Morse's essay describing the ghosts that haunt the urban firefighter-EMT's dreams after twenty years on the job since I first read it in early June. Michael puts those who focus on the affordability of public-sector pay and pensions in a delicate position — deliberately, I imagine. Who could look such a man in the eye and balance tax rates against the trauma of his experience?

Such balances have to be made, however, and both sides of public policy questions have to be weighed. Were resources unlimited, and were human nature less complex, we might be able to assess the value of every job based on the case that its practitioners could make for themselves. As it is, we have to be a bit more circumspect about various measurements of value.

For one thing, firefighters and EMTs are not solely rewarded through their pay and benefits. Michael provides a bullet list of dramatic scenes — murders, suicides, child abuse, and accidents — but (for this particular essay, at least) he places his hand over the other side of the ledger. How many days did he drive home justifiably feeling heroic? How many lives has he had the opportunity to save? People to help? His twenty years haven't been a long slog of death and unavoidable failure, and while one can place a dollar value on neither the strain of helplessness nor the euphoria of defeating death and destruction, at some abstract and variable point, they would surely balance without any monetary compensation at all to make up the difference.

The careful reader might note a mild contradiction in Michael's text: When speaking of the passage of time between his early days on the job and the present, he writes that "20 years passed in the blink of an eye." Yet, a few sentences later, "20 years in firefighter time is a long, long time." That's hardly an "a-ha!" catch on my part. "The blink of an eye" is a mere turn of phrase, and the reference to "firefighter time" evokes the fullness of the days, weeks, and months. An important point hides within the contrast, though.

Michael's twenty years have been rich in experience, and despite the tone of his essay, not all of them have been haunting and negative. Some midlevel corporate functionary who's trudged through the same length of time among gray cubicle walls bathed in florescent lights pushing numbers along some process watching his body soften and sag every time the computer screen goes blank won't have the smell of charred infants in his nostrils, but neither will he know the pulse of a revived heart beneath his palms. Time is slow, indeed, for those with no cause to blink.

Even with life affirmation and a sense of purpose somehow factored into the equation, it may very well be that twenty years is too long for some men and women to spend battling flames and injury in particular environments. If that's the case, it still isn't obvious that the solution is twenty to thirty years of retirement, particularly when the cost thereof threatens the very solvency of the local civic structure. Perhaps the solution lies in the opposite direction — removing the incentive to linger on the job for so long, making firefighting an experience shared by more people, earlier in their lives. Or perhaps the necessary changes needn't be so dramatic.

Whatever the case, I can only encourage Michael to enlist the memories of his victories in the fight against his demons. An unsustainable pension system can in no way substitute for the strength that he has within.

Yet Another Prod for Pension Reform: Fitch Cites West Warwick’s High Unfunded Pension Liability

Andrew pointed out yesterday that Speaker Fox is leaning against taking up binding arbitration in the special legislative session this fall. That would be a good thing because, last week, a Fitch rating emphasized the need for the focus to be on pension reform.

RATING RATIONALE:

--[West Warwick] has managed its operating expenses and achieved positive results in fiscal 2010, helping to increase its reserve levels but pension contributions remain well below actuarially required levels.

--Unfunded pension and other post employment benefit (OPEB) liabilities are very high.

West Warwick, of course, is not the only municipality facing this situation; in fact, the unfunded pension liability for Rhode Island cities and towns totals $2 billion. This is in addition to a $3.6 billion shortfall for promised-but-not-funded post-retirement health care coverage also referenced by Fitch and excludes the multi-billion dollar shortfall on the state level.

All of these shortfalls have been exacerbated by the absurdly early age at which public employees have been permitted to retire. Neither a pension nor "lifetime health care coverage" is remotely sustainable when the amount of time that an employee works is equalled or exceeded by the length of his or her retirement.

Cranston Mayor Allan Fung warned this week that, in the absence of pension reform, Cranston would have to choose between city services and pension payments; i.e., between the present and the overburdened past. Indeed, as Donna Perry points out, Cranston will not be the only municipality compelled to make such harsh choices.

Fung spoke for city and town leaders across the state when he urged the panel to understand that community budgets will break if modifications to benefits for existing retirees are not recommended.

Oh, the Pain - Warwick Disability Pensions: Fire Exceed 40% (Don't Forget the Police @ 20%)

Looks like the Warwick Beacon has been doing some digging at City Hall.

More than 40 percent of retired Warwick firefighters and 20 percent of retired police are on disability pensions. The pensions are tax-free and also ensure that their children and spouse are entitled to free tuition at state colleges. There has never been a case where they have been brought back to work, according to the recollection of City Personnel Director Oscar Shelton.

The killer is how the disability pension becomes permanent: all the employee has to do is complain about pain.

Shelton says the scenario he offers is typical:

A firefighter is injured on the job and is put on injured leave at full pay. After a time, the firefighter seems to be better, but complains of pain. Bringing him or her back for a job less physically demanding would make sense, but the individual could still complain of pain. Doctors’ opinions vary and there’s no definitive test.

Meanwhile, firefighters covering for the absent member cost the department overtime while the disabled officer gets full time pay. The chief looks to reduce costs and knows placing the firefighter on disability pension would cut costs by nearly 33 percent immediately. The chief makes his recommendation to the Board of Public Safety. The firefighter goes on disability pension.

“It’s a short term solution for the department but long term cost to the city,” said Shelton.

No kidding. If you don't check, lots of people are going to jump on the gravy train - at least, until it hits the bankruptcy abutment.

Not Careless Planning, but Political Calculation

The lengthy comment-section discussion appended to my pension post, from yesterday, is worth following, but I wanted to tease out one suggested made by Providence firefighter Tom Kenney:

The reason these systems are in such financial disarray? The state and the municipalities have continually deferred their expected (and required) contributions so much that the systems are going broke. In other words, careless planning and budgeting by the politicians who control the purse-strings are the real reasons we’re now facing such a shortfall.

Variations of this have been the preferred explanations from the general treasurer on down. Gina Raimondo blames abstract politics; Kenney blames vague politicians, many of whom have now moved on to other things and are no longer within reach of political consequences for their decisions (even if the public were perspicacious enough to impose them, which it is not).

And that was pretty much the point: Promising public employees golden lives through their golden years was a way of reaping political rewards without having to pay for them. The planning wasn't careless; it was a result of the incentives that unions created with their negotiating techniques and political heft.

Look, the money that ought to have gone to pensions in the past didn't just evaporate. Either it went to other government expenditures (whether to buy more votes or actually fulfill obligations) or it never really existed in the first place. If Kenney's politicians had fully funded their pension promises, they wouldn't have been able to fund other promises, and the reforms that are now on the table, or something like them, would have been necessary decades ago.

Personally, if I were relying on a pension for my retirement (which, in reality, I'm not expecting ever to experience anyway), I'd be paying close attention to the subject, and anybody who's watched private-sector pensions disappear, with the remnants slipping toward government subsidization, should have seen this coming. In part the failure to do so was born, in part, of an expectation that government can always confiscate more revenue through taxation. In larger part, it probably derived from the assumption that more-informed people would make everything work out, somehow.

Well, that should have been the politicians, and it should have been the union leaders — the very people with incentive not to face such issues head on, honestly, and in a transparent manner.

"Rhode Island's Rising Pension Tide" Video

The Providence Republican City Committee has posted the complete video of Gary Morse's presentation on "Rhode Island's Rising Pension Tide" on their YouTube channel. You can view the first part by clicking below:

Since Roland Lavallee, who made the official recording for the Providence Republicans, got much better sound quality than I did, I will repost my list of some of the interesting and informative highlights, with links cued to take you right to the video of the subjects described...

1. The meaning of "the discount rate" and its value.	Video
The troubles with the discount rate, including spiking.	Video
How much does spiking cost the taxpayers?	Video
2. The changes to pension law and pension practice that occurred in 1991 and 2006.	Video
3. How what has happened in a place called Prichard, Alabama could impact Chapter 9 bankruptcy proceedings in a place called Central Falls, Rhode Island.	Video (1); Video (2)
4. Some suggested reading, if you're interested in how the courts might decide the pending Council 94 lawsuit.	Video
5. The role that debt played in the Suez crisis of 1956, and its parallels to today.	Video
6. A not-very-rosy prediction for everyone's future.	Video

Lack of Sympathy for the Pensioner

Time will tell whether I'm an isolated cold heart or part of a growing swell, but I'm having trouble mustering the sympathy that the preferred storyline implies I should feel for public-sector pensioners. The "human angle" that the Providence Journal tried to emphasize in an article yesterday provides an excellent example:

In fact, [Donald] Cardin, 46, who retired [from the Central Falls fire department] in 2008 after 22 years as a firefighter, needs to work to pay the bills. He formed his own company, D'Amico Painting Contractors, in North Providence. He climbs ladders, scrapes shingles and spreads on new coats of latex because he can't live on an annual pension of $36,000, which breaks down to $28,800 after taxes.

I have no problem stipulating that anybody who "retires" at 43 should have to continue working in some fashion. At that age, the money that the pensioner receives shouldn't be more accurately described as "residual income" from a previous job, or somesuch. And Cardin may consider that guaranteed $36,000 "peanuts," but one must wonder how many of the painters with whom he competes have such a nice cushion, including (it must be noted) his completely free Blue Cross & Blue Shield.

That's the perspective that ought to dominate during meetings of General Treasurer Gina Raimondo's pension advisory board. Instead, we get reports of this:

Some panel members questioned whether state and local plans are meeting professional recommendations that retirees should receive anywhere from 65 to 80 percent of their salaries when pensions, Social Security (if applicable) and personal savings are added up.

Alicia H. Munnell, former assistant to the Treasury secretary under President Bill Clinton and head of the Center for Retirement Research at Boston College, said she is worried that people are not in the habit of putting money into savings, and that public pension plans need to take this into account.

By the time one retires, one should have saved enough and paid off enough of their mortgages and so on to scale back on expenditures once they're no longer employed. In the private sector, with its absence of official retirement ages, readiness is part of what determines whether a worker can stop working. There's no reason public sector employees should be any different just because they can band together in powerful unions that help elect the people who make decisions about their income.

Moreover, if "people" are not saving enough in general, then it makes little sense to take more money out of their paychecks in order to fund defined benefit pensions for folks retiring well before they've truly exhausted their working years. That's why, when I read such statements as this, I remain unmoved:

"One can debate whether it's good or bad, fair or unfair policy, but legally it makes no difference," contended Tarantino. "We've read and heard a lot about 'broken promises,' and there's a visceral reaction to that. In the world according to John Tarantino, people should keep their promises."

Granted, lawyer John Tarantino was laying some sympathetic gauze over his argument that the state should be able to change the terms of existing pensions, but this stuff about "promises" ought to be considered more specifically. When most of the pension "promises" that are strangling our towns, states, and nation were made, I was just beginning to work and not of voting age. I didn't even live in Rhode Island. Why should I insure public employees against the possibility that they didn't save enough to retire comfortably in their forties and fifties?

Working Towards Pension Enlightenment

In his Monday tip-sheet, Ian Donnis of WRNI (1290AM) reviewed some of the details coming from the second meeting of State Treasurer Gina Raimondo's "pension advisory panel". The second item from the post includes a quote from panel member Robert Walsh, Executive Director of the Rhode Island chapter of the National Education Association...

The math is still the math. A defined benefit pension system is still the most affordable way to provide retirement security.

But in any meaningful fiscal sense, "affordability" is a dubious choice of criterion for describing the advantages of a defined benefit retirement system. Defined benefit plans differ from defined contribution plans in the assumption that DB plans have access an outside pool of money that they can draw upon at will, in order to pay a guaranteed benefit level. That pool of money doesn't appear "for free" -- it is part of the pension costs to the taxpayers.

Both types of plans depend on the investment growth of money in the plan. So why should defined benefit plans be assumed to be more "affordable" than a defined contribution plans? Is it that funds in a DB plan should be assumed to grow faster than the funds in a collection of DC accounts? The presenter at last week's Providence Republican City Committee's pension forum, Gary Morse, suggested that this is not automatically valid...

If you had invested in a balanced portfolio, when you came in as a teacher in 1980, you would have outperformed the investment rate that you got from the state.

Perhaps there an assumption being made that poor choices by a collection of individual DC investors will depress the ideal rate of return. OK, that assumption could be built into a forecast -- but then, to be fair, you have to consider that "managers" (both financial and political) of a DB pension system will make non-ideal choices too. In fact, several generations of DB system "managers" have combined to make decisions that have been so bad, they have brought the system to the brink of collapse. So, if the idea that individuals allowed to invest their own retirement money will make bad decisions is going to built into the analysis of DC plan, then doesn't the potential -- and the reality, by the way -- of bad decisions of the kind that can and have put the current system on the path to bankruptcy have to be considered in the analysis of DB plans?

(And all of this still doesn't begin to address the problem of retirement security for people who want to change jobs and/or careers during their lifetimes. Shouldn't people who don't decide on the career until later in life, or who actively choose to try a few careers over their working lifetimes, have the same shot at a decent retirement as those who decide early on what it is they want to do for the next 30 years?)

Finally, Robert Walsh offered other interesting remarks to Ian Donnis...

Well, certainly we’re going to have to bring them [on the other side] into enlightenment...

I think that folks like [Mayor Allan Fung] and some of the city and town leaders are going to come around to understanding that things like re-amortization have to be part of the final answer here because so much of the problem is the unfunded liability.

A positive relationship between reamortization and enlightenment is difficult to establish, however. Reamortization is the passing the costs of mistakes made by past generations on to future generations. That is not enlightenment -- enlightenment begins with cleaning up our own mistakes, and passing as clean a slate as it possible to the next generation. We cannot achieve that, by forcing people yet to be born to pay for our screw-ups, at a time when they will be working hard to make lives of their own.

Ted Nesi of WPRI-TV (CBS 12) also has a report on the meeting, available here.

Raimondo: Disability Pension record keeping not so good

General Treasurer Gina Raimondo reveals that the RI Disability Pension record-keeping system hasn't been up to snuff (via ProJo):

In 2009, 18 percent of the 559 disability files lacked paperwork that is supposed to be filed yearly showing that the worker is still disabled and how much money they have earned in addition to their pension, according to an auditor's report.

"Among the years we examined, that was the best result," said Boyd Foster of auditing firm Sullivan & Company, headquartered in Providence.

Other years had about 40 percent of the paperwork missing while some had none or virtually none of the required paperwork, Foster told the board.

"There were clearly some holes there," he said.

Almost like people were hiding something.

The Wrong Starting Point on Pensions

See, this is exactly the wrong starting point for resolving the state's pension problems; indeed, it's indicative of the wrong approach to government in general:

All of these ideas and more were batted about on Monday during the first meeting of the new Pension Advisory Group that state Treasurer Gina M. Raimondo, a Democrat, created in consultation with Governor Chafee, an independent. ...

... with Rhode Island's state-run, government-employee pension systems' $7.303-billion hole, the panel set itself a handful of seemingly simple goals: figure out how what a fair pension for a government worker should be, and then figure out how the state and its cities and towns should pay for those benefits.

No rational understanding of "fairness" is possible without prior knowledge of how a particular benefit is going to be funded. But it's just that backwards construction of pay and benefits in government, with its absence of market forces, that has moved the shovels of those who've dug our hole.

Real Person Account of Pension Advisory Group

G.B. Short's letter to the ProJo is worth highlighting. He went to the Pension Advisory Group meeting about which I've already expressed some skepticism. Let's just say his first hand, real person account does little to alleviate my reservations. First, about the makeup of the members:

Early on in the meeting it was stated that this board was set up "to represent the interests of all Rhode Islanders," a sentiment the organizers expressed more than once. With that, my first instinct was to look at the makeup of the board as members introduced themselves. Of those appointed, four are union leaders from the public sector -- a disproportionate weighting at the outset, even acknowledging that labor will have to participate in the final solution and should have a voice.

There was not one clearly identified advocate for the taxpayer, while there should have been several. There were advocates for business and industry. And as the three academic members of the board are probably slated to receive pensions from their institutions I cannot count them to be unbiased....There was not one advocate for non-public union retirees...Certainly non-public union interests should have been present, as well, since many of these wage earners will also be substantially impacted through taxes on their income. One member of the board is retired, but his role as a president of the North Providence Federation of Teachers certainly disqualifies him as an independent advocate for retirees. When I questioned the board's makeup after the meeting, I was told he was proposed to fill that [ie; the "retiree's"] role.

Short also provides some context surrounding the line I focused on in my prior post, “I don’t think the private sector is what we want to emulate.”

[M]ost of the board's members, if not all, based on their current employment status, will likely draw a pension from their institution or union. This is an educated guess. As potential pensioners, board members quickly showed a bias in their expectations of what the benefits of a pension should be.

For instance, the discussion came up early on as to what income a retiree should expect a pension to provide for the rest of their lives. It was quickly settled by common agreement that about 80 percent of previous income was the expected norm...I can tell the board members that as one who had to provide for his own retirement, an 80 percent salary drawdown on your investments is an astoundingly good return, if not reckless, on your lifetime savings and investments going forward for the rest of your life, and one most of us who worked for a living privately can only dream about.

Amazingly, in the early phase of the meeting, I heard one expert participant from academia reject any alternative to a defined-benefits plan (a plan where the employer guarantees your future income for the rest of your retired life), declaring that employee contribution plans (i.e., a 401 [k]), which most of us in the private sector have, are "not anything we want to duplicate," as Ms. Gregg reported.

I waited for someone on the board to challenge that statement. Not one single board member commented!

Great.

Pension Panelist: “I don’t think the private sector is what we want to emulate.”

So said Alicia Munnell of the Center for Retirement Research at Boston College and one of the 12 appointed to the RI Pension Advisory Group. Munnell elaborated further:

“I strongly believe that [the private sector model shouldn't be followed],” she repeated after the 2 1/2 -hour meeting, “because what you have seen in the private pension system is movement from the old-fashioned defined-benefit plans to 401(k) plans. The [hypothetical] employer puts in 3 percent; the employee puts in 6 percent” and, in the end, “people have such inadequate balances in those accounts. ... That’s not anything we want to duplicate.”

No kidding. That's why the solution is to take even more money from the poor private sector saps to continue insulating public sector pensioners from economic reality, right? Look, I understand (as NEA's Bob Walsh states) that the majority of the public sector pensions aren't "gold-plated," but let's stop acting like pension promises of the past are sacred blood oaths or that modest changes will result in people living in the poor house. The private sector model may not be great, but it's what present and future taxpayers can afford.

By Contrast with Common Sense

The stunning thing about this pension reform proposal from Republican state representatives Patricia Morgan and Michael Chippendale is that it wasn't the way the system was set up to work from the beginning:

With these two objectives in mind, we have introduced HR-6193. This legislation lets an injured employee receive a disability pension under the current rules. However, if he or she is fortunate enough to rehabilitate the injury, or find other employment that is unaffected by it, then the rules change slightly.

The disabled retiree can work and earn an amount of money that, when added to the disability pension, will equal 100 percent of their pre-injury salary. However, with each additional dollar, they would lose one dollar from the disability pension. This method lets each retiree be made whole, while at the same time protecting taxpayers from abuse.

At this point, with the history of abuse, I'm not sure that Rhode Island could afford to stop there in its reforms, but it's a marker of the lunacy by which the state operates that reforms so distinctly sound like policies that one would assume were already in place.

Pawtucket Pension and Retirement Shortfall: $500 Million (Just Pawtucket)

... which includes $83,000 a month in disability pensions. And that item could have been even higher, if you can believe it, but Pawtucket has an enlightened - by Rhode Island standards - rule that shifts disability pensioners over to a regular pension at retirement age. (So there are cities and towns which do not make this shift but allow the pensioner to continue collecting the more generous disability pension? Why? The person is now of retirement age.)

Major kudos to Ethan Shorey at the Valley Breeze for researching and bringing these figures to light.

Documents obtained from the Pawtucket Personnel Department and state records show that the city's pension system is currently paying out $46,369 a month in long-term disabled retiree pensions to 10 police officers, two firefighters, and four other municipal workers.

Another 11 "injured on duty" employees, five firefighters, two police officers, and four municipal workers, are being paid a total of $36,548 a month out of the city's general fund.

The public safety pension and municipal health benefits funds are together an estimated $500 million under-funded, according to officials.

In other words, the retirement shortfall of just one city of thirty nine equals half a billion dollars. As Providence is starkly demonstrating, many of our cities and towns don't have the revenue to simply operate, never mind begin to cover the chasm that comprises our retirement liability

Yet, a couple of weeks ago, the Senate President almost seemed to be warning the legislature against taking up pension reform.

Senate President M. Teresa Paiva Weed warned legislators that recent attempts at pension reform had been bitterly opposed, and cost some senators and representatives their elected offices after they won passage.

So what is the alternative, Madam President? Shall we simply allow public pension checks to start bouncing in a couple of years?

An Acute Example of the Broader System

If you skipped the historical essay to which Marc linked on Monday, give it a read. It concerns the making of the pension mess in Providence, and its most valuable insight, in my view, is the light that it shines on the entire dynamic created by public sector unions.

The defining statement comes from firefighter and Local 799 union President Stephen Day, who was a member of the 1989 Providence Retirement Board that then Chief of Administration John Simmons said "broke the city":

"All we did" on Dec. 6, 1989, says Day, "was vote in broad daylight and do what we had the right to do. If we had the authority to do this, we were going to do it. You can't fault someone for being aware" of the laws. "I don't regret it at all."

Of course, union leaders typically have good reason to be aware of the law, because they work so hard in such a long-term coordinated fashion. Step one was to give the unions the controlling hand on the Retirement Board:

During the 1970s, Senate Majority Leader John P. Hawkins, a former Providence firefighter himself, and other senators began advocating legislation that would add two union representatives to the city's Retirement Board, thus tipping the balance. The legislation eventually passed around 1977.

Step two appears to have been to insert some innocuous-seeming language in the city's home-rule charter, and step three was to lob a court case into the system (to a judge with who knows what motivation) to change the nature of the board's authority:

The [spring 1989] case involved a Providence police officer, Walter Bruckshaw, who, along with 100 other city employees, wanted to buy credit in the city pension system for work they had done for other government agencies. The Retirement Board denied them. The court ruled the city's home rule charter, which went into effect in 1983, granted the Providence Retirement Board control over city pension decisions.

And voila. Day and his counterpart in the police union, Richard Patterson, ran for seats on the board promising to "boost the pensions of current and future retirees. The result? Compounded cost of living adjustments (COLAs) of 3-6%, tripled minimum pensions for police and firemen, and reduced minimum years of service. As city administrators strove to control the bleeding, the unions maneuvered these issues into contract negotiations. Then came all of the individual Pension Board decisions:

In 1991, every police officer who retired in Providence –– 21 in all –– received a job-related disability pension from the Retirement Board.

Of the 53 firefighters leaving their jobs, the Retirement Board approved disability pensions for 48 of them.

So, yes, Day's statement about authority isn't without justification, but the authority ultimately comes not from the narrow scope of Providence politics and governance, but from the reality of public-sector unions in the first place. The unions get a seat at the negotiating table as employee representatives, and they get a hand in the political process that determines those with whom they'll be negotiating. That's simply the incentive structure of the system, and as becomes more undeniable with every passing month, the incentives are far too strong even for fiscal reality and inevitability to overcome.

Pension Blame

I heard it again this morning--on the WPRO morning show, this time--probably in relation the ProJo's latest in their pension series on "how we got here" regarding the pension mess ("They Just Broke the City"). Yes, we know we messed up in the past, goes the refrain, but what can we do to make it better in the future? It's time to stop blaming people and look ahead, etc. It's similar to the no-blame game being played by the General Treasurer. Try to shove it in the past--bury the blame--and move on.

What is missed is that it is necessary to assign the proper blame so we know how to deal with the problem. If we don't properly identify the cause, we can't come up with a fair solution. So when we learn that a union run retirement board did more than it's fair share to put Providence in it's acute pension predicament--mostly thanks to COLAs and disability retirements--then we shouldn't feel too bad when recommending reforms that take a fair amount of flesh out of current retirees. Thanks to COLA's, for instance, they've seen their pension double in 12 years. Pretty good return, no?

The unions didn't act alone, though. As the ProJo story makes clear, politicians, the courts and, yes, voters did their share and were complicit in constructing this failed system. It's a "full Rhode Island."

That's why, despite the pleas of RI cities and towns, the General Assembly isn't rushing into any fixes and seems content to sit on their hands until the fall. If they even really do anything then. We were screwed then and we are screwed now. Maybe when the checks stop coming, something will get done.

From Whence the Pension Reform Problem in Rhode Island

Ed Achorn's most recent column highlights how little has changed in the public discussion of pension reform. This snippet, from a 2005 column of his, caught my eye in particular:

"Robert Walsh, executive director of the National Education Association Rhode Island, responded to last week’s cries for pension reform by dismissing it all as a partisan plot.

"'Republicans support pension reform. Well, yeah. Where's the story? Where's the news?' he asked."

The photograph of an ostrich accompanying the essay is apt. Ultimately, there are no surprises, in this; it's just that Rhode Islanders have been told to ignore such problems until the checks are literally nearing the point of not being written and then to expect one-time fixes and tax increases. That's the cycle that our current collection of elected officials are likely to pursue now, and it's a cycle that simply has to end.

It was also interesting to come across the name of a politician whom Governor Chafee tiptoed through revolving-door ethics rules to hire, with Achorn describing a 2003 essay:

Many legislators dismissed growing annual pension costs as small potatoes. I wrote: "$20 million-plus is still worth debate in most people's books. And the costs are exploding: Pension contributions for state workers and teachers are slated to go up $60 million in the next year, says Mr. Carcieri. This would seem to present a crisis that cannot be ignored."

(Now, in 2011, of course, the state confronts pension costs growing by hundreds of millions of dollars a year.)

Steven Costantino, then vice chairman of the House Finance Committee, accused the pension reformers of trying to stir up emotions. "You simply can't cherry-pick an issue which is a hot button or a good sound bite," he said.

Frankly, the only hope for Rhode Island is if voters begin teaching politicians that there can be consequences for their actions, which lesson has thus far been left to public sector unions to impart.

Looking at the Working Disabled

Being categorized as "disabled" regarding one job doesn't mean you can't legitimately work another (like a less physically demanding desk job). But should you be able to collect an entire disability pension AND work? Some don't think so:

Two freshman Republican lawmakers are seeking to cap the disability pensions paid retired municipal workers who have moved on to new jobs in the private sector.

Should the recipient of any disability pension "supported wholly or in part by a municipal or quasi-municipal entity be engaged in a gainful occupation,'' the bill says, "the retirement system shall adjust and at least annually readjust...the amount of his or her disability pension.''

"If the retiree is able to work and earn a salary, then the disability benefit should be decreased,'' said Rep. Michael W. Chippendale, R-Foster, of the bill that he co-sponsored and introduced on May 26, along with Rep. Patricia L. Morgan of West Warwick, a former state GOP chairwoman.

As Morgan and Chippendale explained their bill, it would allow retirees receiving disability pensions to "receive earnings that when combined with their pension equal 100 percent of their base, pre-retirement salary. For each dollar earned that exceeds this amount there would be a corresponding reduction in the pension benefit received.''

"Disability pensions are intended to provide for workers who can no longer work because they have been severely injured or have become permanently disabled. Taxpayers are more than willing to provide that benefit. Unfortunately, this system of support has been unfairly exploited,'' Chippendale said.

I'm guessing this proposed limiting of disability pension remuneration is restricted to those who matriculate into the private sector because applying it to those who move from one public sector job to another are covered by collective bargaining, which probably prevents such modifications without opening up contracts. This makes me wonder how many actually go from public to private instead of stay in the public sector, collect disability, pile up the time-in-service, etc. If the number is low, how many will stay in the public sector should this be passed. Damned if you do....

Endorsements and Blame

Marc's call in to Matt Allen Show, last night, touched on the Projo's now-laughable endorsement of David Cicilline and Treasurer Gina Raimondo's efforts to blame nobody for the pension mess that she counts as the issue facing Rhode Island. Stream by clicking here, or download it.

Selling Pension Reform: The No-Blame Game

When traveling the state and talking to various union groups, it's understandable--politically, yes, but also pragmatically--that General Treasurer Gina Raimondo is refraining from playing the blame game (well, except for various "politicians" of the past). She needs unions on board to make reform happen and if the rank and file can understand the scope of the problem and be persuaded that there is no malice in reform, then perhaps union leadership will not resist. So, we have this:

[S]he stressed that politics, not public employees, are to blame for a “broken” pension system that is endangering the security of their retirements, while also threatening to crush taxpayers with billions of dollars of debt.

“If there’s anything to blame, it’s politics,” Raimondo told more than 300 members of Local 580 of the Service Employees International Union gathered at the Cranston Portuguese Club off Elmwood Avenue. “For decades, politics has trumped honest, financial accounting.

“The fault does not lie with you. ...You have done nothing wrong. You have played by the rules,” she said. “The fault lies with a poorly designed [pension] system that has been faltering for decades.”

She's correct in that union members did nothing explicitly wrong in paying into the pension system crafted and promised by their leadership and mostly Democratic politicians. But she's also glossing over things. After all, union members did have a role to play in the "politics" she condemns. They are, at the least, implicitly responsible for the current pension mess for supporting and electing the union leadership and Democratic politicians that crafted this fiasco. The same leaders who don't necessarily play by the same rules.:

Both of the SEIU’s national pension plans issued “critical status letters” to their members in 2009​—​the Pension Protection Act requires such letters to be issued when funds can cover less than 65 percent of their obligations. The SEIU, however, maintains a separate pension plan for its national officers that was funded at 98.3 percent, according to the latest data.

Or actively undermine Raimondo's proposals while standing right next to her:

Frank Flynn, the president of the Rhode Island Federation of Teachers, told his retirees that the potential pension cuts that Raimondo outlined a day earlier, including a suspension of cost-of-living adjustments (COLAs) for retirees are “just examples. They are not recommendations at this point,” he said.

For Raimondo, it's certainly easier in the short-term to suggest to people that they are victims than to tell them they are at least partially to blame for the events that have led to their current problem. For union members, it's easier being a victim than confronting the fact that you were naive, duped or made bad choices in trusting who you did with your future.

As for the politics, in the long term, if real reform happens, then this soft-sell tour may not insulate Raimondo from union ire (though it will ultimately be the General Assembly's stamp on the reform). Then again, there is no historical or political reason to believe that the General Assembly will be proactive, so, while I don't doubt her sincerity at all, politically it looks like she'll be able to present herself as a pro-union, "pragmatic progressive" reformer and maintain her future political viability.

A Debt You Can Leave Behind

The top story in Sunday's Providence Journal had to do with the $30,000 that the average Rhode Island household owes in pension and other retirement benefit payments, beyond what has been put aside.

The bill now stands at $13.63 billion — $9.37 billion for pension payments that have been previously reported and $4.26 billion for other benefits, primarily medical insurance, that The Providence Journal has newly calculated from state and municipal financial reports. ...

And that's on top of more than $200 a year from each household to cover new costs accrued each year for pensions and benefits for future retirees.

Struggling families should consider that next time they hear of public-sector employees retiring in their early 50s. Of course, what the article doesn't mention is that Rhode Islanders can settle this debt — at least for themselves — simply by leaving. That's particularly relevant to an accompanying table that shows the unfunded liability for each town. Tiverton's, I note, is $36,172,948. Little mostly-rural Tiverton swings beyond its weight class when it comes to a history of bad governance.

It's at least a mildly silver lining to see what we've been saying around here being stated as explanatory fact:

Each year, through employee and taxpayer contributions, enough money should be put into pension and benefit funds to cover the credits the employees have accumulated, factoring in how much the contributions will earn through investments. ...

The Governmental Accounting Standards Board says the money should be put aside in the year that the employee earns the benefit rather than after the employee retires. Delaying payment, as happens under pay-as-you-go, hides the true cost of the work force.

"Hiding." That's been the objective of Rhode Island's corrupt government, and "pay as you go" continues to be the mantra of people, like Tom Sgouros, who owe their livings to the vast flood of money that rides along with public sector employees. (What savings might the state, schools, and municipalities realize if the labor union infrastructure were cut from the loop?) Pay attention when they argue that there really isn't a pension problem or that people aren't really leaving Rhode Island for reasons related to government. These are the arguments they've never had to make publicly because our elected representatives never pushed them on any of it.

Frankly, if the state has a debt that residents can avoid by leaving, it seems to me reasonable that the state can declare the larger part of that debt no longer owed. After all, taxpayers can leave it behind because taxpayers didn't actually incur it as a debt.

Re: The Raimondo Roadmap

Ted Nesi of WPRI-TV (CBS 12) deserves a line-of-the-day credit for this Twitter entry...

On pensions, Raimondo says "Failure is not an option." I'm pretty sure it is though, just not her preferred one.

The Raimondo Roadmap

State General Treasurer Gina Raimondo unveiled her roadmap for pension reform today (ProJo covers here and WPRI's Ted Nesi is live-tweeting). Here's the report (pdf) and a new website, "Secure Path RI". Her report takes a "where we are now and how we got there" approach. Here are some ideas she's floating:

1) Set retirement age at 67.
2) Current accrual rate is in the 1.6 to 3% range (example: a 2% rate leads to a 70% pension benefit). Raimondo mentions that most private funds are 1%.
3) Deal with COLAs.
4) Look at hybrid plans (part defined-benefit, part defined-contribution).
5) Anti-spiking provisions to prevent "end-of-career increases in pension levels."
6) Coordinate with Social Security when determining pensions.

To stress: these are just ideas being floated, not concrete recommendations. A study group is going to be convened prior to the July budget submittal.

As We're Waiting for Godot Gina, the Latest on Rhode Island's Public Pension Disaster

So here's where we stand.

> Tomorrow at 2 pm, G.T. Gina Raimondo presents the history and making of Rhode Island's pension crisis, to be followed by a "menu" of remedy options.

> She admits to being on a bit of a crusade. Like that's a bad thing when even a liberal think tank in Washington, the Center on Budget Policy Priorities, is aghast, in an analytical sort of way, by the severity of Rhode Island's unfunded pension liability (the funding level is now less than 50%), concluding that only "radical changes" will solve the problem. (H/T WPRI's Ted Nesi.)

> This summer, the General Assembly will convene a study commission to examine the options presented by the G.T. I know, I know. As Speaker Gordon Fox is talking about making it a BRAC style commision, however, there is hope that, this time, something productive will come of a study commission. Not to mention the urgency involved in staring down the barrel, in little more than a year, of a doubling of the taxpayer contribution (to 621 million non-existent dollars).

> General Assembly leadership have agreed to a reconvening of the G.A. in the fall to take up the recommendations of the pension study commission.

> While acknowledging that the amount is "nowhere near what's needed", the Governor is standing by his recommendation that a 3% raise coming to state employees be channelled to a higher pension contribution. The Senate President agrees with him. I agree with the employees, who are resisting. There should be no increase in anyone's contribution until the pension system is salvaged.

> We would be remiss if we did not mention the rumor circulating that the General Assembly has agreed to a compromise: pension reform gets passed but so do binding arbitration and perpetual contracts. If this is the case, don't bother with pension reform. Better to have the swift financial death of no pension reform than the slow, agonizing end represented by binding arb and perpetual contracts.

> And the last item (for the moment) on pensions: a couple of legislators, who clearly have been residing in a different solar system for the last twenty years, filed a bill that would define pensions benefits as property rights. Hey, chuckleheads. Quit lying to our public employees. You can't create rights to something that not only does not exist but has no hope of coming into existence. The checks WILL start bouncing unless we do more than sit around smirkily passing empty laws.

What's Been Earned

On last night's Matt Allen Show, Matt and I talked about fixing the pension system and whether pensions are earned more than private sector income. Stream by clicking here, or download it.

To Reform Pensions, Reform Everything

In the comments to my post on RI Sen. Minority Leader Dennis Algiere (R., Westerly), Monique asks a reasonable question:

Is there even one municipality in Rhode Island who can fund the new (HIGHER) contribution specified last week by the state Retirement Board?

To answer, I think it is necessary to begin by saying that there is no policy solution. There is no "how a municipality can fund its pensions"; there is also no "how the state can fund the municipalities' pensions." Yet, there's also no chance that the state will find the will to adjust the benefits sufficiently to make up the gap, or that taxpayers will accept the necessary burden. I'd go so far as to say that there's no combination of these four that is politically workable in the current environment. It's an unsolvable problem on policy (as opposed to political) grounds.

I can certainly see the plain common-sense logic of pushing the pension problem up the government scale. After all, if you can spread the pain, it won't hurt so much, and if you can just get the right group in office, it can force the necessary change. But the latter is a huge if, and the former emphasizes that spreading the pain begins to tilt the scale in favor of those who stand to profit from a salvaging of that which is broken (who will have no change in motivation) and against those who wind up paying (who will have decreasing motivation as the pain spreads).

But I think municipalities can fund their pensions 100%, and here's how:

Year 1: As a political escape hatch, the General Assembly forces municipalities to fund pensions 100%. The average RI community makes some minor adjustments to spending to cover the cost but fills most of the gap with tax increases.
Year 2: Outraged residents begin taking over key roles in local government and/or applying pressure to elected officials in an exponentially greater degree.
Year 3 : Newly motivated people learn the ins and outs of local government and are tripped up by an establishment trick or two.
Year 4: Local elected officials with spine change unsustainable pension promises, refuse to implement any unfunded mandates, demand changes to state regulations that hurt them and their communities, and finally begin to focus on changing zoning and taxation policies in order to encourage economic development and broaden the tax base.

That's a much cleaner process than is likely to happen anywhere, and it's certainly not a sure progression everywhere. But it seems to me that pushing the issue to the state doesn't change the necessity of the steps; it just puts them on a playing field in which taxpayers have a weaker hand and ensures that the delay will be longer and the accumulated pain greater, probably with an end result that the General Assembly waits until enough other states reach the same critical condition to start a movement to push the problem on up to the federal government.

Still Wary of Consolidation, Even of Pensions

RI Senate Minority Leader Dennis Algiere (R, Westerly) reminds me that I'm wary of consolidation, even when it's meant to resolve the state's pension crisis. The voices of National Education Association Rhode Island Executive Director Bob Walsh calling for reamortization of the pension system and union consultant Tom Sgouros urging Rhode Island to treat pensions as an annual expense rather than a looming debt keep hovering around suggestions such as Algiere's first point on a list of pension suggestions:

Create one whole-state system that provides state, city, and town workers with comparable benefits.

To the extent that municipal pension programs are struggling, it's because they're more apt to be caught between the unions' demands and the taxpayers' willingness to pay. Consequently, they've been apt to make promises to the former and shirk their responsibility to help the latter understand the real cost (mainly by making them pay it). If final responsibility for public pensions in the state were flipped from the cities and towns to the State House, which side of that coin do you think would be more likely be found facing up?

Some of Algiere's other suggestions, it seems to me, answer the problem without consolidation (perhaps better without it):

* No municipal contract or budget can be accepted if it increases that municipality's unfunded liability.

* A municipality must fund 100 percent of its required contribution.

Don't take the heat off of municipalities; make them face it. Don't move the pension system farther away from the people who must fund it; stop disguising the cost.

Note to the State Retirement Board: It's Not Happening

On Wednesday, the Retirement Board ordered that Rhode Island taxpayers boost their annual pension contribution by $266 million in a desperate effort to make up for the decades of underfunding of state and local pensions that were far too generous to begin with. By the way, the unfunded liability of public employees' post-retirement benefits is not included in this amount.

South Kingstown Town Manager Steve Alfred pegged it.

"Unsustainable," he said, summing up the new pension payments in one word. What the retirement board did "with the stroke of a pen," he said, was to saddle current taxpayers with the burden of making up for years of insufficient pension funding. "This does not take into account taxpayers’ ability or willingness to pay," he said.

So let's look at those last two items. Bless him for talking about willingness to pay. But we are well aware that the willingness of and, for that matter, fairness to the taxpayer has rarely entered into the consideration of Rhode Island's elected officials when they contemplate contracts and laws which cater to their pet special interest.

Ability to pay, however, is quite another matter. Certainly, along with willingness and fairness, our elected officials have failed to factor revenue realities into too many of the contracts, laws and promises that they made. Unlike the first two items, however, it is not an element that they are able to overcome simply by executing a contract or passing a law.

Shall we review current budget conditions at the capitol and around Rhode Island?

Even after an unexpected and welcome boost in revenue projections popped up this week, the state's annual operating deficit is still north of $200 million.

Providence runs out of cash in late August. And even that is optimistic in that it is based upon a projection that assumes that the city secures contract concessions from city employees and a wholly new revenue stream from non-profit property owners, none of which is a certainty.

Perhaps the scariest news item I saw this week was the Moodys one notch downgrade of Warwick's general revenue bonds. Freakin' Warwick??? With its miles of commercially taxed properties, I always thought of Warwick as even more fiscally stable than Barrington and EG, 100% comprised as they are of multi-millionaires. (Multi-millionaires can hop on their private jets and relocate at a moment's notice; businesses tend to go and stay where there's revenue.)

With regards to the other thirty seven cities and towns, rather than bore you with a complete run-down, I'll simply ask the question: how many of them are consistently running an annual seven-figure surplus that they can funnel towards the Retirement Board's wishful thinking?

As for the capacity to wring additional revenue from Rhode Island taxpayers, the state already has the fifth highest state and local tax burden and one of the worst business tax climates in the country. Prima facie, we're maxed out on revenue and, in fact, we very much need to reverse course on that front.

It's brutally simple. The largest per capita unfunded pension liability in the country is not going to be solved with an increase in contributions. The choices, accordingly, are stark. Write every current and future retiree a check for the amount that they've got in the fund, as former Mayor Steve Laffey recommended yesterday. Or adjust benefits.

The passage of time is not going to amplify these choices or make them any easier. Anyone - politician or union leader - who says otherwise is either grossly delusional or lying. (Speaking of delusional or lying, who organized last week's teacher rally demanding that Providence hire back all teachers? Can I have some of the drugs you're on? They must be goooo-ooood.)

The state is no longer in a position where it can ignore the problem for political reasons. We are now at the point where we can see that state checks - pension, paycheck or both - will bounce. "Down the road" has arrived for the can; there's no place further that it can be kicked.

Pension Realities*

R.I. taxpayers facing increased contribution to state pensions.

For Men:

...the moves would increase the projected amount that state and local taxpayers are required to pay for these public employee pensions from an overall $308.5 million this year and $358.7 million next year to $621.8 million in the budget year that begins July 1, 2012.

And, as Monique mentioned last night, don't look for any reform before this year's budget is submitted.

For Women:

Meanwhile, as Andrew's invaluable list of bills showed, the unions are making their move to forestall reform--including pension reform--in the state senate by setting the status quo into law. Donna Perry and the ProJo editors noticed.

*First video courtesy of the old MTV program "The Man Show". This is a test to see if eye candy along with pension stories can grab attention. Let me know if it worked in the comments.

A People Beaten Down

Marc and Matt discussed the hammer that keeps pounding Rhode Island on last night's Matt Allen Show. Stream by clicking here, or download it.

Little State, Big Problem

Rhode Islanders are used to thinking in proportional terms. When state-to-state comparisons are made, we look for the percentages and ratios because absolute numbers typically mean little. Sure, Massachusetts' government spending is many times Rhode Island's, but the question is how much it amounts to per capita.

So, at first glance, one may very well misread the numbers in the following:

The tab comes in at $9.4 billion for the unfunded liability for 155 separate plans run by state and municipal entities in Rhode Island, according to a Providence Journal analysis of pension-plan financial reports.

The total in New York state: $45.8 million, less than 1 percent of Rhode Island's.

That's right: our state of around a million people is talking billions while a nearby state twenty times the size is talking millions. Frankly, Rhode Island can muck with its tax system all it wants — making "revenue neutral" changes that shift the burden from productive people to less productive ones, lowering sales taxes in such a way as to create an actual and massive tax increase, whatever — but the powers who be really must hope that people who might invest in Rhode Island by moving or setting up shop here don't look too much beyond quick-glance FAQs about the state.

As Monique's post inherently hints around the edges, even staring down the throat of this leviathan, Rhode Island's leaders are most likely to do what they've done consistently over the last decade and more: do anything just to get through another year. The main difference is that we've now shifted from one-time fixes to futile hopes that problems will go away.

General Treasurer: No Pension Reform This Session. (But Is It Wise to Postpone It To an Election Year?)

Turn to 10's Bill Rappleye reported shortly after 6:00 this evening that General Treasurer Gina Raimondo will not submit a pension reform plan for consideration in the next six weeks; i.e., by the end of this General Assembly session. This contradicts a statement by Speaker Fox, by the way, who, give him credit for demonstrating a willingness to tackle the issue, said that pension reform was a possibility before the end of this session.

The Treasurer does not wish to rush such a monumental task and she is correct not to do so. At the same time, if the matter is left to the 2012 session, will it get done? Some legislators will undoubtedly be fearful that, if they vote for badly needed (understatement of the decade) pension reform, public labor unions will still not have learned their lesson, even with the end upon us, and will stupidly primary them in favor of an unscrupulous candidate who whispers sweet pension nothings into their ear. ("Back me. There's nothing wrong with the system. Your pension is safe with me.")

Rappleye further reported that Ms. Raimondo

... said it's possible her office might have something over the summer or in early fall.

That still might work. If the leadership of the General Assembly is serious about making sure that pension checks don't bounce definitively addressing our wrecked public pension systems, they would not end this session next month but, rather, go on summer hiatus and meet again in the fall to address the matter.

This will be the most difficult matter that the General Assembly ever undertakes. It will only exacerbate the task if they are voting on a solution a week before it's time to pull candidacy papers.