Riley: The Odds That RI Pension Plan will be Fully Funded by 2040
Michael G. Riley, GoLocalProv MINDSETTER™
Riley: The Odds That RI Pension Plan will be Fully Funded by 2040
So first the fund is solvent. But I emphatically stated there is little or no chance of ERSRII being fully funded in 25 years. From my perspective it’s just math. The discount rate assumption is simply too high and returns are too low and as a result the State is knowingly underfunding the pension plan thus shifting our current cost burden to the next generation.
A review of the facts shows the current unfunded pension liability is estimated at $5.65 billion dollars. It's calculated like this. The total actuarial amount owed is roughly $13 billion less the assets which are $7.26 billion. $13 billion is the present value of the already incurred liability discounted at 7.5%. The recent 2015 CAFR shows on page 127.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTPage 127 Shows the sensitivity to a change in actual returns. A 1% lower return assumption to 6.5% increases the PV liability by 25% or approximately $1.4 billion dollars. This would mean the state would need to contribute more now to fund existing liability going out 25 years.
State doesn’t want to put up adequate funds
The state is well aware that if return on assets falls shy of forecasts of 7.5% then more money must be contributed to the pension plan from the general revenues. That means less spending on current services or increased taxes to pay for prudent and critical pension funding. (Reminder: Rhode Island at 56% funded is in Critical Status)
So leaving aside the ridiculous cherry picked talking point from the RI Democratic Party Chai, let’s examine the justification for a 7.5% return assumption. From January 2011 when Raimondo took office until January 31, 2016, the fund has been composed and managed under Raimondo’s strategy. Treasurer Magaziner, despite talks of financial wizardry in his campaign, has made virtually no portfolio changes in the first year often saying how well the Raimondo strategy is working. The returns are a woeful 5.4% in the 5 years of the Raimondo portfolio. For the last 10 years the returns are 4.4%.
In addition to the fact that returns haven’t even come close to 7.5% the chances of achieving that return are virtually nil given the Zero Interest rate policy (ZIRP) that has now morphed to negative interest rates (NIRP) in much of the industrialized world. But I guess there are some really astute managers out there in the actuarial world still predicting returns of 7.5% or as in the case of Providence 8.25%.
What do the Gurus say about returns?
It’s pretty clear that anyone who is minimally experienced or knowledgeable thinks a prudent estimate is about 5% and the politicians who need to spend retirees' money on other stuff pick a number out of the rear end.
What are the odds we are fully funded in 2040?
Back to the original Question what are the odds that ERSRI will be fully funded by 2040. My guess is between 0 and a 5% chance. But this does not have to be a guess. Gina Raimondo in her Truth in Numbers publication sought to put an odds figure on being fully funded by 2040 and at that time they estimated 47%. This comment from a slide deck: "As of July 1, 2012, the investment assumption will be lowered to 7.5%, but the state has <50% chance of reaching that target.
So what is her estimate now? Or Seth Magaziner’s or Auditor General Hoyles ? Perhaps the media should ask those in charge who should definitely know how to calculate this number. To tell us the chances our pension plan will be fully funded by 2040. Gina has proven she knows how to calculate the odds. Why won’t she comment?
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.
