Riley: How Does Providence Arrive at 8.25% Discount Rate for Pensions?
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: How Does Providence Arrive at 8.25% Discount Rate for Pensions?
It is well known that Providence 8.25% assumption is a joke and a national outlier, but Mayor Taveras desired this high rate so he wouldn’t have to recognize a much higher pension liability thus requiring millions more in annual ARC payments. Those millions could send Providence into a tailspin short term and severely affect the budget so he chose to fabricate the rate. To the rescue comes the 20 year adviser to Providence Pension Fund, Wainwright Investment Counsel LLC. Wainwright claims that 8.25% is appropriate despite being far away from most other cities in America. It has been impossible to find out what other cities Wainwright manages and whether they also support an 8.25% assumption. Perhaps it’s true that Wainwright and Providence Board of Investment has far superior management skills to Warren Buffett who has suggested below 6% is more appropriate and that’s what he uses.
Moody’s also suggests a discount rate below 6% and the Gasb 68 calculation for Providence produces a rate below 5% used for Reporting purposes in 5 months. So logically there are a few possible explanations for the chosen Discount rate of 8.25% lets list them and have the GoLocalProv readers respond.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTWhich of these explanations for Providence use of 8.25% Discount rate do you believe?
- Wainwright Investment Counsel has skills far beyond those of Warren Buffett and can annually outperform Warren Buffet by 2.25%.
- Each elected Mayor, since the hiring of Wainwright Investment Counsel by Buddy Cianci in 1995, have been Chairman of the Pension Board of Investment and are particularly savvy investors each deserving high expected returns.
- Recognizing the budgetary effect of changing expected returns to a realistic 6% would increase annual pension contributions from the city by 10’s of millions of dollars and also increase the current unfunded liability by close to $1 billion dollars. This would cause a squeeze on other services producing cuts and layoffs and or higher taxes. Mayors don’t like to cut services or raise taxes so they lie.
Providence Pension Liability
Unfunded Liability in 2013
Total Liability: $1.2 billion
Actuarial Assets: $380.4 million
Unfunded Liability: $831.5 million
Unfunded Liability in 2011
Total Liability: $1.2 billion
Actuarial Assets: $380.4 million
Unfunded Liability: $831.5 million
Percent Funded in 2013
Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.
Funding ratio in 2013: 31.39%
Percent unfunded in 2013: 68.61%
Percent Funded in 2011
Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.
Funding ratio in 2011: 31.94%
Percent unfunded in 2011: 68.06%
Rate of Return
Former Assumed Rate of Return: 8.5%
New Assumed Rate of Return: 8.25%
What the state’s assumed rate of return is: 7.5%
What Moody’s Investors Service says the assumed rate of return should be: 5.5%
What investor Warren Buffet says the assumed rate of return should be: 6%
Actual Return on Investment
Actual Market Return in FY 2012: 1.49%
Actual Market Return in FY 2013: 11.35%
Current Assumed Rate of Return: 6.42%
Average Market Rate of Return for FY 12 and FY 13: 8.25%
Impact of Lower Rates of Return
$72 million:The city unfunded liability increased by this amount when the city lowered its assumed rate of return by a quarter of a percentage point, from 8.5% to 8.25%
$506.2 million: The estimated increase in the unfunded liability were the city to use the 6% assumed rate of return recommended by Moody’s Investors Service.
Retiree Pay – Fire and Police
Number on Active Duty: 834
Average Annual Pay: $61,325
Number of Retirees: 587
Average Retiree Age: 65.3
Average Retiree Annual Pay: $40,512
Disability Pensions – Fire and Police
Number on Disability: 418
Average Age: 64.8
Average Annual Pay: $59,028
Retiree Pay – Other City Workers
Number of City Workers: 2,164
Average Annual Pay: $38,687
Number of Retirees: 1,453
Average Retiree Age: 72
Average Retiree Annual Pay: $18,252
Disability Pensions – Other City Workers
Number on Disability: 88
Average Age: 66.8
Average Annual Pay: $18,684
Current Cost of Pension Fund
For 2013
City Contribution: $58.1 million
Employees Contribution: $10.9 million
Net Investment Return: $18.1 million
Cost of Retiree Benefits: $95.4 million
Note: Net investment return is the return on investments after investment and administrative fees have been paid.
Cost of Pension Fund in 10 Years
Normal Cost: $9.8 million
Additional Cost Because
of Unfunded Liability: $84 million
Total Annual Cost: $94.3 million
Note: Total figure for the year includes a small second payment for the deferred liability.
Cost of Pension Fund in 20 Years
Normal Cost: $13.9 million
Additional Cost Because
of Unfunded Liability: $118.5 million
Total Cost: $132.4 million
Paying Off Unfunded Liability
Average annual increase: 3.5%
Number of additional years to pay off: 27
Fiscal year unfunded liability to be paid off by: 2040
