Riley: Rhode Island Pension Fund Meltdown in Full Force
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: Rhode Island Pension Fund Meltdown in Full Force
But there is still lots of risk and even more in Municipalities which are getting shellacked in this market without any plans to deal with the Issues. Providence Officials continue to lie and mislead municipal bondholders about the financial condition of Providence. Many cities and towns have had bankruptcy pushed off, not because of reform but because of a 5 year bull market in Stocks. Well that appears over. August declines were massive. We calculate that the State lost between 3 and 4% for the month on their investments. That shortfall of $300 million dollars added to the $450 million shortfall for the fiscal year just ended :totals $750 million in just 14 months. Again, this is just the State pension fund.
Budgeting
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTI don’t know the answer to this but do the various ongoing revenue and expense reviews given to finance committee members include the Status of Pension Underfunding? If for example the Stock Market closed the year down 15% and Interest rates actually rose at the same time. We calculate the State Pension Fund will lose an additional $700 million dollars totaling a shortfall of $1.45 billion over fiscal 2015 and fiscal 2016. Would this extra $1.45 billion in pension liability affect the Governor or Speakers budget or the contributions necessary to fund the Pension plans properly? It should. This is not phony debt. The debt is very real and accounting standards are making them real by bringing the pension liabilities right on to the balance sheet.
A not so unlikely sequence of events
Preparation is key to good government, Crisis management is a bad way to govern. Rhode Island has barely scraped by in the recent past with one time fixes like tobacco bonds and the shaky foundation of casino revenue to cover up really bad spending decisions and way too generous State and municipal employee benefits. The Structural deficit is huge right now even with or without an explosion in Pension liability.
Here’s my scenario..
- Stock markets continue to be unstable.
- Providence Finances are investigated and the city is forced into receivership.
- The cost to the State to bail out Providence will affect all matter of projects and current spending. Taxpayers all over the state will have large tax bills not only from Providence but from the reduced revenue in their own towns.
- Critical infrastructure works will come to a grinding halt.
- 38 Studios lack of investigation will continue to hamper any new borrowing or outside investment because we just don’t Trust Raimondo, Mattiello and Kilmartin. After all, why should we?
- With the whole country suffering from reduced budgets and spending and worsening Pension and OPEB funding, Providence and Rhode Island will become totally expendable. No white knights to save the day.
Do Raimondo and Mattiello have a plan B?
Have they even thought about the possibility of a recession and or Providence Bankruptcy? What will their priorities be? I am really concerned that there is no Plan B. While I am sometimes impressed with Raimondo’s moves to fix the Government Corruption and waste, that the last Governor claimed to fix, I do not have high hopes for Mr. Mattiello who shows little effort to address corruption. Fixing Providence before it melts down on all of us is the single best thing Mattiello or Raimondo can do right now. The Director of Revenue should move in tomorrow and shut it down. The last 15 years of numbers given to the director of revenue by Providence have been false. This year’s numbers are no exception. The pension fund status and the removal of $63 million in pension assets through a default from the city is a good place to start.
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.
