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.

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Snow
Snow
10 years ago

Spreading lies again? No retiree can or has been able to leave service after 20 years unless they are police or fire, ok, got it, finally. I’m a teacher who has taught 28 years, and I can’t leave. I have to wait until I am 62, and that is in 10 years. I won’t be eligible to retire until I have taught 40 years. I am not under the more stringent 2005 changes either, only the 2009, 2010 changes. If they raise the retirement age to 67, I will have taught 45 years.
All of us will be 67 in the classroom, and no young person will ever get a teaching job. Plus, the cities and towns will pay top step to all its teachers. That’s pension reform!

Snow
Snow
10 years ago

BTW, it’s last five years of service, not three, in determining you pension amount. Also, teachers have absolutely no way to make overtime. When we tutor after school we make 1/4 of our hourly rate, and it isn’t allowed to be computed towards our retirement.
Everything you write about in your zero-fact piece relates to state police and municipal fire and police–nothing pertains to state workers and teachers. Do some minimal research before you fear monger. The least you can do is to try to keep up!

Snow
Snow
10 years ago

How in the world is this “Nirvana” for vesteds, not “vestees,” btw. The multiplier is reduced to 1% from, in my case, 2.25% ( which was 3% before the 2009 changes)? The age is tied to SS, which is 67 for most of us, and we will have a 401b, which can’t possibly turn into much with the little time (15 years, in my case) left for it to initially grow. Also, using the average of one’s salary for teachers will hit us very hard. We start out now at 35,000 a year, and it takes ten year to reach top step, clearly a rip-off. We pay 9.5 in every year. This new pension isn’t worth nearly what’s put into it. The state would be stealing from is to pay down the unfunded liability.
Teachers who don’t get SS, will get the extra 6% added to their defined contribution account. This will cost the cities and towns 6% more per teacher than they are paying now. Plus the rest of the taxpayer contribution will remain at current levels.
As far as retiree are concerned, of a plumber gets a pension of 17,000 ( which is actually high) how in the world will this be worth anything in fifteen years? Most state workers make a pittance, not lavish salaries.

Patrick
Patrick
10 years ago

“When we tutor after school we make 1/4 of our hourly rate…”
What’s your hourly rate? Every time I try to figure it out, teachers tell me that it’s not possible to calculate an hourly rate.

snow
snow
10 years ago

They are right, it is difficult, and artificial too. We are paid based on just the actual classes we teach, even though we have homerooms, advisories, three minutes between Classes, and other added time aside from unpaid planning and correcting time. So, figuring it out is an exercise in, almost, futility. I figure it out based on my actual classes taught, the way the district determines it, but it is in no way accurate.

Dan
Dan
10 years ago

Snow claims teachers are paid 1/4 their hourly rate for tutoring. When asked what their hourly rate is, Snow answers that there is no accurate way to determine it. How does this make any sense?

bob
bob
10 years ago

Snow is speaking in “union tongue”

michael
michael
10 years ago

Snow has presented a rational argument from experience, rather than conjecture. Maybe you guys should listen

Dan
Dan
10 years ago

Michael – If public workers were paid what the felt they deserved, the economy would be destroyed and money would be worthless.

Roland
Roland
10 years ago

If I recall the figures correctly that were published in the Providence Journal shortly before the end of the legislative session, Social Service program benefits in this state were $1.8B and this did not include the administering of those benefits.
Projo published a figure of $3.3B which is over 1/3 of the states revenue stream.
How about we cut those benefits in half first, cut COLA to nothing because why should we be so generous? This would help make good on promises to the existing retirees even though it was an absurd amount to promise them.
Then model our pension system after a private system of 401K plans. Never mind hybrids, just 401K plans.

snow
snow
10 years ago

Roland, where do you get the idea that the state is being generous? Workers paid for these benefits. The normal cost of a Teacher’s pension is 12%. the teacher puts in 9.5%. So, that means the state is contributing under 3%. pension benefits for those not-yet-retired are very cheap for the state. Retirees COLA’s are not outrageous either, they don’t even amount to a match, as some private companies give to worker’s 401(k) s.
You know what is generous? Using my pension contributions to fund DEPCO. Also the free ride the state received for 40 years, when from 1936-1975, when the state co tributes nothing to the pension system. There’s your unfunded liability.
Don’t forgot that half the teachers don’t pay into SS. That’s a 6% savings for the cities and towns for every teacher in those municipalities that don’t participate.
In 2001, the pension system was 77% funded. What happened? Your buddies on Wall Street, that’s what. The next time you want to give more tax breaks to the rich, consider who put RI’s pension system in jeopardy.

Justin Katz
Justin Katz
10 years ago

I’m getting whiplash from Snow’s argument…
On one hand, he/she cites all the numbers that depend on an 8% return on the system’s stock-market investments (“The normal cost of a Teacher’s pension is 12%. the teacher puts in 9.5%. So, that means the state is contributing under 3%.”) Then, suddenly, Wall Street is to blame for not realizing the investments that Snow and the teachers demand for their retirements.
Not mentioned is the effect that it might have had on the investment market knowing that governments at all levels were relying on high returns. How can government not bail out those who’ve engaged in risky behavior when so many billions of dollars of public-sector pensions require it?
As for the impossibility of calculating an hourly rate: BS. In this, the teachers’ unions are like every contractor I know in construction. They talk about numbers as if they’ve got everything calculated down to the penny, but in reality, they’re just guesstimating backwards from their bank accounts.
Teachers aren’t alone in all the tasks they don’t technically get paid for. They are, however, somewhat unique in the dishonest negotiating scheme that obviously takes into account the sum total of their jobs and then pretends that all that stuff is extra.

David C
David C
10 years ago

I read where snow says, “The normal cost of a Teacher’s pension is 12%. the teacher puts in 9.5%. So, that means the state is contributing under 3%”.
Under the federal system that I’m in, and which the treasurer seems to be using as a model for the proposed changes, the defined benefit pension is a 1% per year system, and the cost of that is 12% of payroll. Currently the employee pays only 0.8% of that, which congress is already targeting to increase.
Note that I’m also paying social security and, in my case, 11% of salary to a 401K type account.
So I don’t understand how the “cost” of the current RI pension system can be only 12% of payroll. Maybe I did not read snow’s posts correctly?

Andrew
Editor
10 years ago

The latest actuarial valuation available on the Employee’s Retirement System of Rhode Island website puts the taxpayer contribution at 23% of payroll in FY2012, jumping to over 36% in FY2013; that’s the number in addition to the contribution taken directly from employee payroll. See page 24: bit.ly/niMtTi

mangeek
mangeek
10 years ago

“We need to start walking back from the fifth highest tax burden nationally. That’s never going to happen if…”
It’s not going to happen ever. Unfortunately, Rhode Island is the most urban state, urban schools and services cost more to provide. There’s no getting around that. I’ve poured over the numbers in the budgets and looked at the options, the only way Rhode Island could be a Low Tax state would be to cut services WAY below what other states offer.
Monique, a while ago you mentioned that you thought I had been replaced by a ‘progressive pod-person’. That’s not entirely untrue. I just realized that RI is never ‘going red’, but it desperately needs the reforms conservatives are asking for; not to be a ‘low tax’ state, but to be a state that has ‘acceptable’ taxes and ‘great’ services.

Mike Cappelli
Mike Cappelli
10 years ago

Yo snow,
Go take a look at who your thug union leaders donated your union dues to. You’ll see that it’s the scumbag politicians that screwed you over.
Save your crocodile tears for someone who doesn’t know the truth. You pathetic lemmings allowed it to happen so deal with it. Your union sucks and you haven’t figured it out yet. Smarten up!

Justin Katz
Justin Katz
10 years ago

Mangeek,
You should chat with Tom Sgouros. He’s been running around for the past few years explaining that high taxes are a result of people moving OUT of the city. (Services are easier to provide in close proximity, he says.)
I don’t know what numbers you’ve been looking at, but I wonder if it might be relevant to observe that urban areas tend to be more liberal and to elect Democrats. That could play a role in why their costs are higher…

Dan
Dan
10 years ago

“Snow has presented a rational argument from experience, rather than conjecture. Maybe you guys should listen”
Posted by michael at October 8, 2011 4:56 PM
I wonder if Michael has any revisions to make to his smarmy, holier-than-thou comment now that Snow’s statement has been proven totally false.
Just because somebody is a public employee doesn’t mean they have the “inside scoop” or a better understanding of any of these issues.

Snow
Snow
10 years ago

Again, more misinformation: percentage of payroll includes the Teacher’s and state workers contributions (remember it comes from our checks so it’s payroll) and healthcare owed to retired workers.
The unfunded liability is 7 billion, the other 2.1 is the municipalities. The ProJo always confuses this. Never get hour pension info from them.
The state made 10% historically over the last forty years, 20 % last year. And 14% the year before.
The reason the unfunded liability was 4 billion 7 months ago was because Raimondo convinced the retirement board to lower it from 8.5 to 7.25 ( don’t quote me on this the quarter perceive may be off). One of the lowest assumptions in the country.
Finally, don’t get your info from ProJo, read Raimondo’s Truth in Numbers and the actuaries PowerPoints which are on the General Assembly site. I always teach my students to go to primary sources before secondary. Yes, I’ve only been following this for a short time–28 years.

snow
snow
10 years ago

To be fair, I would also like to add, this info is complicated and has changed dramatically over the years as legislation tampered with it five or six times just during my 28 years. When your pension depends on these changes, most people are very aware of all the nuances of them. The ProJo Frequently confuses the liability of the state and the municipality and the differenciations between B members and AB members and their benefits. Add the benefits of retirees and those able to retire, and the situation gets far more complex. Follow Ted Nesi if you must get your info from the media. He tries very hard to get it right, and when a mistake is pointed out to him, he revises. Also, he is the most open-minded of them all, especially concerning the judicial pensions and their shady accounting rules.

Andrew
Editor
10 years ago

Snow,
You are flat-out in error with your claims about the “employer contribution rate” in the actuarial reports including the “employee contribution”, i.e. the money taken from employee payroll. They are clearly treated as two separate quantities in the calculations.
The easiest way for someone confused by the issue to see this in the most recent actuarial report (bit.ly/niMtTi) is through the “employer contribution rate” chart on page 24, for the years 1999 and 2000. For those years, the “Employer Contribution” is *less than* the percentage taken from employee paychecks, which would not be possible if “employer Contribution” is an aggregate of both sources (really one source, the taxpayers, passing through two different routes).
If you don’t believe me, I can send an email to the General Treasurer’s office tomorrow morning, asking to clarify the definitions, but in the meantime, I’m curious: is the idea that employer contribution includes employee contribution something you concluded on your own, or is it something that’s been told to you by your union leadership?

michael
michael
10 years ago

“Snow has presented a rational argument from experience, rather than conjecture. Maybe you guys should listen”
Posted by michael at October 8, 2011 4:56 PM
I wonder if Michael has any revisions to make to his smarmy, holier-than-thou comment now that Snow’s statement has been proven totally false.
“I hereby as the possessor of all knowledge, and being a fantastically mustachioed handsome and brilliant specimen of all that is manly revise the previous comment:
Snow is wicked smart, you dopes should get the cotton out of your ears and put it in your mouths, or in this case, tape it to your fingers.”
Now that was smarmy and holier than thou.

Patrick
Patrick
10 years ago

Question for Snow, who has been following this for 28 years and is up on the nuances of the pension discussion. When you saw that the pension system was being drastically underfunded and you saw that the courts decided that this was legal as long as the payments were being made to retirees, why did you negotiate it into your contract that the pension system would be properly funded? In other words, why did you allow these elected politicians underfund your pension without a fight?

Snow
Snow
10 years ago

Unions can’t negotiate state statute. Teachers work for municipalities. How would a Providence Teacher’s contract negotiate pension funding which is outside its negotiating parameters?
Consider this: fro
1936-1975, the state contributed nothing to the pension system. Massive unfunded liability right there.
Andrew. Check out the percentage of so-called pension obligation that is simply OPEB, that most state workers and teachers no longer get.

Justin Katz
Justin Katz
10 years ago

Snow,
Sorry to say, but a relatively quick review of the actuarial report to which Andrew provided a link suggest that you’re either confusing the various numbers in play or trying to obfuscate the numbers. Consider:

The employer contribution rate is the sum of two pieces: the employer normal cost rate and the amortization rate. The normal cost rate is determined as a percent of pay. The employer normal cost is the difference between this and the member contribution rate. The amortization rate is determined as a level percent of pay.

So:
ECR = ENC + AR, or
ECR = (NC – MCR) + AR
Turning to the Teachers table on page 3, we can plug in the numbers as follows, under the latest assumptions:
35.25 = 2.32 + 32.93, or
35.25 = (11.82 – 9.5) + 32.93
It is the NORMAL COST that includes the employees contribution. What you’re leaving out is that the employer also pays the amortization percentage (i.e., the amount that must be contributed in order to have the entire current liability paid off by June 2029). OPEBs have nothing to do with it.
For clarity, it should be noted that the teachers’ pension system is also complicated by the state contribution. The total employer contribution is 35.25%, but the state takes care of 14.27%, leaving 20.98% for the local district.

snow
snow
10 years ago

Justin, what you are confusing is the rate the state plus the worker pays for the normal cost and the unfunded liability. The “normal” cost is the amount necessary to fund an individuals pension based on their particular benefit structure, i.e. A, AB, or retiree/eligible to retire. This number is separated from the unfunded liability already owed for retirees, and of course, would include amortization. An active worker’s normal cost is 12%. The worker pays 9.5% and the state/municipality, pays 2.5%. Even the State’s actuary, Joseph Newton acknowledges this. Check out Alice Munell’s breakdown of this on the Boston College’s Pension Center. They have also determined this percentage. BTW, the B workers are paying all of the normal costs for their pensions. Consider that for all active workers, under fifty cents on the dollar goes towards their own pension, most goes towards the retirees unfunded liability. This is the reason the unfunded liability can never be paid without attacking the retirees COLA. All of this is just an academic exercise because the unions will win the lawsuit.

snow
snow
10 years ago

As far as the amount teachers are paid: I was not trying to be evasive in any way. We are quite literally paid per class, so this number is what we paid as our hourly rate. It doesn’t include homeroom, or advisory, or planning, or anything else. It isn’t that those duties are necessarily free, it is just that this is the way the district calculates are wages.
Why? The reason is because we are paid to teach classes. If a teacher is hired to teach part time, she is hired by the class. Say a teacher teaches five classes a day a regular full-time schedule), and a part time teacher is hired to teach two classes only. This pt teacher is paid 2/5 of salary. Now, this teacher may come in at the end of the day and have no homeroom or advisory, yet, she still is paid by the class, as is the teacher who has the extra normal duties of HR, and the rest.

Justin Katz
Justin Katz
10 years ago

If I was confusing anything, it wasn’t the pension numbers, but which “percentage of payroll” you were referencing above, and rereading, my impression is that you were coy from one comment to the next. The average resident doesn’t care what an individual pension theoretically costs, but what the public’s expense for the whole system is.
Even within your comment, you illustrate how abstract the “normal cost” of a pension is. If “for all active workers, under fifty cents on the dollar goes towards their own pension,” then the employer must be covering the other 50 cents, in the long run. In a practical sense, “normal cost” must be considered within the context of the system as a whole.
That’s why we shouldn’t reamortize, because it merely pushes back the date at which the normal will be as you describe (costing loss of investment revenue, too).

mangeek
mangeek
10 years ago

“We are quite literally paid per class”
That’s odd. I have about a dozen friends who teach and I don’t think any of them are paid ‘per class’. They all get a salary that matches the steps in the contract, and the older ones have as few as two classes a day.
This gives me an idea though… Perhaps paying per-class (i.e. teacher workload) would be a way for Providence to ‘put the market to work’ on getting higher teacher utilization.

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