How Big is the Real Unfunded Pension Liability, Madam G.T.? We Had an Answer in October
… though even it may have been too optimistic.
In her interview yesterday with Kathy Gregg, General Treasurer Raimondo points out that the assumed rate of return on the state’s pension fund is almost certainly not realistic. She goes on to ask the logical question.
Over 10 years, she said the state has averaged 4.4 percent, which is significantly less than the 8.25 percent assumed rate of return on investments the state’s pension consultants have used to determine the magnitude of the state of Rhode Island’s unfunded obligation to its retirees, “which means the unfunded liability is probably higher than what we hear about.
“That’s one of the things I am trying to figure out straight away,” she said. “How big is the liability?”
And here’s one answer, thanks to 1) WPRI’s Ted Nesi who spotted a reference to a report commissioned by 2) former G.T. Frank Caprio and made a point of requesting and then posting it October 6.
An indication of just how much money we’d owe was buried in a June 1 memo to the treasury by Gary Bayer, an actuary at the big broker Aon, that Caprio’s office released this week. Aon was asked to estimate how much larger the unfunded liability would be if we assumed a 6% return instead of an 8.25% one, and here’s what Bayer came up with:
If liabilities were valued based on a 6% rate instead of the current 8.25% rate, we estimate that the unfunded liability would increase from $1.7 billion to $2.7 billion for the state employees and from $2.7 billion to $4.6 billion for the Teachers.
For the mathematically challenged, that’s an increase in the unfunded liability from $4.4 billion to $6.5 billion, or nearly 48%.
At a 6% return, which is still inflated over the actual rate of return for the last ten years of 4.4%, the liability grows by 48%. What does it look like at the realistic rate of 4.4%???
So bad, I, for one, don’t want to see it. It’s clear that even at the inflated rate of 6%, we’re in enormous trouble. I’d like to suggest that we cut our “losses” here, at 6%, stop calculating and turn to fixing the problem.