Riley: More Providence Pension Abuse of Public Employees
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: More Providence Pension Abuse of Public Employees
Asset Overstatement
Because of this discovery, I began an independent investigation. I asked Providence officials, Wainwright Investment Counsel LLC and the state's auditor what was going on here. I wrote about the process. The story can be reviewed on old columns of mine on GoLocalProv.com or here.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThen in 2015 Segal, the new actuary/auditor for the retirement system agreed with my contention that over-stated assets in the pension plan of $63 million dollars was improper and as a result added approximately the same amount to the City of Providence unfunded liability. Whoops! That $60 million dollar bill increased the burden on taxpayers for generations and properly accounted for unwinding a political lie on the books of Providence.
Now more misleading rip-off of employees
The cost of the “asset lie” will start hitting taxpayers in 2018 when the actuary recalculates the funding plan. Alas this is not the only misleading behavior of Providence that is to the detriment of Public employees and the retirement plan.
For decades Providence Fire and Police have been contributing a portion of each paycheck to their own pension plan that is supposed to be matched by an appropriate contribution from the City. The City contribution is to be a match plus an amortization of unfunded contributions for work already performed the workers but not yet paid by the city. The excuses for not paying run the gamut, but suffice it to say that Mayors and Councils tend to sweep costs under the rug today to get re-elected next year.
Unsurprisingly, this type of fiscal management lead to huge cash flow problems. So somewhere along the way, the city, which had continued to allow the workers to contribute 26 pay checks from July 1 to June 30 the next year (fiscal year end), got even farther behind and instead of depositing the workers’ pay check contributions with the Investment Commission and pension plan advisors for interest and capital appreciation, they just held on to the workers money and likely used it for other things.
How do I know Providence screwed workers?
Wainwright Investment Counsel, the city's advisor, was probably sick of my accusations or poor returns and began publishing the cash flows from the City of Providence. This was an extremely unusual disclosure. The documents show that Providence held on to the workers’ contribution not only all year long (zero inflow to pension plan) but sometimes for 16 months before contributing it to the workers’ retirement plans.
Meanwhile, cash outflows to pay retiree benefits were $8000 a month. Obviously every year the Plan sinks like a stone. If Donald Trump had done that, he would be on fire in Burnside Park and maybe that would have been proper, because really, how low can these Mayors and City Council go? Steal from their own workers? Then bury the next generation in debt?
This report graphically shows a plunging pension plan balance and the negative cash flows since 2005.
So according to Law, when does the employer need to deposit employee contributions in the plan?
ERISA –
If you contribute to your retirement plan through deductions from your paycheck, then the employer must follow certain rules to make sure that it deposits the contributions in a timely manner. The law says that the employer must deposit participant contributions as soon as it is reasonably possible to separate them from the company's assets, but no later than the 15th business day of the month following the payday. For small plans (those with fewer than 100 participants), salary reduction contributions deposited with the plan no later than the 7th business day following withholding by the employer will be considered contributed in compliance with the law. In the Annual Report (Form 5500), the plan administrator is required to include information on whether deposits of contributions were made on a timely basis. For more information, see the Department of Labor's Ten Warnings Signs That Your 401(k) Contributions Are Being Misused for indicators of possible delays in depositing contributions. Source US Department of Labor
Rhode Island Law
Title 45-21 Retirement of Municipal Employees
§ 45-21-38 Receipt of contributions – Investment of funds. – All contributions received by the retirement system from members and participating municipalities shall be paid periodically to the general treasurer and shall be deposited by the treasurer to the credit of the retirement system. All moneys not immediately required for the payment of retirement allowances or other benefits under the provisions of this chapter may be invested by the state investment commission under the provisions of chapter 10 of title 35. The retirement board has full power with respect to the disposition of the proceeds of the investments and of any moneys belonging to the retirement system.
45-21-42
(3)d Notwithstanding any other provisions of the general laws, the payment of the contributions for the employers' share shall be remitted to the retirement board on a monthly basis, payable by the 15th of the following month.
Timeline - Rhode Island Pension Reform
2005-2010
January 2009
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
2009
Rhode Island increased mandatory employee contributions for new and current employees. New Mexico was the only other state to mandate current employees to increase their contributions.
Read the NCSL report here
(Photo: FutUndBeidl, Flickr)
2010
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
November 2010
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
April 2011
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
May 2011
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
October 2011
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
October 2011
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
January 2012
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement here.
March 2013
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
April 2013
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
June 2013
Reports show that the State’s retirement system increased in 2013 by $20 million despite the reforms being put into effect the previous year.
Read GoLocalProv's investigation into the rising pension costs here.
September 2013
Matt Taibbi publishes an article in Rolling Stone detailing Raimondo’s use of hedge funds as a questionably ethical tool to aid with pension reform.
Read Taibbi's article in Rolling Stone.
Read GoLocalProv's response to Taibbi here.
October 2013
As Raimondo eyes the role of Governor of Rhode Island in 2014, more behind-the-curtain information about the 2011 pension reform comes to light.
Read more from GoLocalProv about the players in the pension battle here.
