Tom Sgouros: Short Takes

Tom Sgouros: Short Takes

Judicial Pension Crisis!

As we continue to enmire ourselves in the debate about pensions, there continue to be a tremendous number of non-fact facts floating about. One interesting example comes up whenever one attempts to bring up the scandalously rich deal that our state's judges enjoy. The counter-claim is that there is no problem there because the judge's retirement system is well funded and doing fine. But the truth is that lots of judges are paid their pensions right out of the state budget, just like we used to do with state employees, decades ago. When, way back in the misty dawn of time -- or 1986, as people sometimes describe it -- our state decided to fund its pension system on an actuarial basis, this legacy of debts assumed before the establishment of its fund were what created its original unfunded liability.

By contrast, when the judicial retirement fund was created in 1990, the judges who weren't in it were simply left out of the system and the $6.1 million of their pension costs still comes right out of the Judiciary budget. Using a fairly conservative assumption about how long these people and their surviving spouses will live, this is approximately a $39 million debt. In other words, if we were to do the math on judicial pensions the way everyone insists we do it for teachers, the judicial fund is in way worse shape than the teachers, and is less than 43% funded.

Whenever I'm talking about the silly way our leaders -- Treasurer, Governor, Speaker, Senate President, House Finance Chair, Senate Finance Chair, etc -- insist we do our pension accounting, people ask me what other states do it the way I'm suggesting. And in fact there are lots of examples of other states that use less expensive ways to fund their pension systems. (And I know what you're going to say, but lots of them have better bond ratings than ours.) But the next time someone asks, I'm just going to point out that we do the accounting a different way within our own state government and none of those leaders seems to think it odd or even an issue worth addressing.

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So how much will our system actually cost?

Here's another non-fact fact you can ponder. You hear the claim that this is really all about math, not about politics or law. But in fact the total amount of the checks the state retirement system will write next year will be a bit more than $800 million, or about 3.5% higher than the amount this year, according to numbers from the state's actuaries. The following year the number will go up about the same amount, and so on for a few more years. After that the rate of annual increase goes down, as the "B-plan" retirees begin to outnumber the "A-plan" retirees. Fifteen years from now, the annual rate will slip below 3% a year, and stay there, declining to about 1% growth a few years further down the line.

A 3.5% growth rate is not nothing, as they say, but it's not a catastrophe. We could lower it just by making the COLAs compound every two years instead of every one, or by lowering the COLA rate slightly, or any of a range of modest changes. This would make the payment growth slower, and make it all that much easier to fund. But instead the accounting rules demand we raise the employer contributions rates by almost 50% next year, thus a crisis.

Again, you can't sneer at a 3.5% growth, but here's a question. In what world is a 3.5% growth rate in expenses a reason for 50% increases in payments next year? Answer: A world dominated by pointless accounting rules, promulgated by people who believe that whatever the private sector does must be adopted unquestioningly by the public sector, and that apparently only columnists of Greek heritage who wear glasses dare to question. In other words, this one.

Teacher retirement age

Part of the pension proposal on the table involves raising the minimum retirement age from 62 to 67. I have searched through the blizzard of paper provided by the Treasurer's office, but so far have not yet found an answer to how much that will cost school systems and state departments. By the time a teacher retires, he or she is usually at the top step of the salary ladder. The replacement teacher will usually be at the bottom. The difference in salary, times the number of people retiring, is a significant amount of money for some school systems, around two percent of their total salaries in a typical year, according to my analysis of a couple of school department budgets. Collectively, our towns pay about a billion dollars in salaries to teachers each year, so this could be a cost to our towns of $15-20 million. (The equivalent cost to state departments would be in the range of $10-15 million.) So far as I can tell, this does not appear to have been taken into account in the savings outlined in the pension proposal documents.

These days, the current manifestation of our nation's 150-year-old education reform movement is all about "teacher quality." Organizations like RI-CAN spend their time advocating for initiatives like "Race to the Top" and others that focus on teacher training and advocacy for alternate routes into the teaching profession. In addition to this hidden cost of the Treasurer's pension proposal, I wonder what education advocates have to say about its effect on the makeup of our teacher corps.

Providence Pensions

I read that the state of Providence's pension system is quite weak and may itself have an unfunded liability of more than a billion dollars. The situation there is more bleak than the state system, with the gap between annual income and annual expenses proportionally much larger compared to its assets. Plus, the city does not have control of its finances to nearly the same degree as the state does. The state has made its own financial bed by cutting taxes repeatedly over the past 20 years, but the city's bed was made for it by forcing it to pick up the slack between what the state gives and what it is required to provide. The City has far less flexibility, so shortfalls are more worrisome.

So it's hard to keep your head from exploding when you learn that the city is disappointed that only 27 officers accepted an early retirement offer. Fortunately, my hat is tight.

If you truly believe that increased pension costs are the among the biggest financial challenges the city faces, then how on earth can you also suggest that an early retirement incentive is a good way forward? More retirees and fewer people paying into the system is a pretty good definition of a way to make the system's finances deteriorate -- how can that be a good idea? To all who scoff at my claim that our pension accounting rules insure our pension funds against risks that do not exist, please consider the flip side of that claim: the rules now in place do not insure us against the real risks to the system, which often come in the form of decisions to weigh small current savings against much larger future expenses. More about this on Monday.

Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].

 

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