News Rhode Island: The Little State With a Big Mess

[Locrian]

My post supported itself - they are considering a 100% tax increase to meet (or guarantee) the under-funded pensions.

Increasing taxes for higher contributions to maintain benefit levels does not imply a guaranteed rate of return. It doesn’t even seem like one.

This is because the actual return for both the individuals and groups will depend on many factors including their mortality, plan design, final salaries and even the tax code. The final return will vary by individual, and it will vary over time for the group.

Do some calculations for a given annuity with different numbers of payments and see how the return varies.

 

[Oltz]

Increasing taxes for higher contributions to maintain benefit levels does not imply a guaranteed rate of return. It doesn’t even seem like one.

This is because the actual return for both the individuals and groups will depend on many factors including their mortality, plan design, final salaries and even the tax code. The final return will vary by individual, and it will vary over time for the group.

Do some calculations for a given annuity with different numbers of payments and see how the return varies.

He is referencing the fact that the TAx payers are paying into the system now at a rate of 10 cents of every dollar the state has and that it is expected to double.

The contributions of those in the system and those recieveing benefits will be unchanged.
The growing payments on the tax payers will supplement the growth to maintain the same level of benefits. Thus guaranteeing the rate of return seen by the recipients.

This is not a 401K where everyone is treated differently this is a state pention plan with a guaranteed pay out regardless of how the market did or does with your contributions. Any losses or short comings are paid out of the general fund currently using 10% of the entire state budget.

They get a percent of the pay they earned the final year at the position it has nothing to do with the actual returns contributions made by them or for them by the state.

IMO this is the problem with all tax payer funded pensions when they run short the people just pick up more of the tab.

 

[Locrian]

Returns on investments are never guaranteed. The issue is who assumes the risk - the state or the employees. With 401(k), etc, it's the employee that assumes the risk of a bad economy reducing the growth of their funds. With definied benefits, the employer agreed to assume that risk.

Very true. And in the private sector, you could, theoretically, point at the employer and tell them to pony up. Private sector pensions are much more heavily regulated than public sector pensions, only sometimes for the better.

But in the public sector it’s different because telling the employer to pony up is just telling the current taxpayers to pony up and current taxpayers often weren’t even able to vote when the agreements were made and the funding problems occurred. They may not have lived there. They may not have received any benefits from the promises, and taxing them may be even more unpopular than taxes usually are.

Asking them to step up brings up questions of fairness, but it also can lead to other consequences such as emigration and tax avoidance. The second is more a problem in other countries, but in states such as RI and NJ, the first may be a problem. As is true of most taxation, those the government can most easily tax to support current benefits might also be those who can most easily leave.

The result is that the only option may be cutting benefits. This is something I like to stress to relatives who will be getting DB plans: they may not be as shielded from market risk as they think. In my state investments are earning (and have been for over a decade) about 5% below what the discount rate is. Eventually, someone is going to eat the difference.

 

[WhoWee]

This news report from 2008 should be viewed by anyone interested in the problem in RI.

http://www.wpri.com/generic/target_12/probing

 

[Locrian]

Since it is of central importance to this discussion, here are some comments on the term “discount rate” as it is being discussed here.

The discount rate is used to determine how much money the plan needs to set aside for its current enrollees. There are many other variables considered that are also important, but this one has attracted a lot of attention lately. A higher discount rate suggests the plan sponsor has to set aside less money now, since the investment will accumulate quicker. A lower rate suggests the opposite. However the benefits are the same in both cases. I should note that if you talk to actuaries they will argue for a subtle difference between what the discount rate represents and what future investments are expected to be. It doesn’t have much impact on this conversation, but we could discuss it more if someone had questions.

The discount rate does not directly determine the benefits that the recipients receive, nor does it directly impact their return on their contribution. If you increase the discount rate to %40 or lower it to 0%, unless you change their benefit structure (ie plan design), their benefits are the same.

If the actuaries (or, in the case of public pensions, the politicians) that set the discount rate knew the future –meaning investment returns, mortality, etc. - (and were honest about it), the result would be that the money contributed & set aside for future beneficiaries would be exactly enough to support them after they retire. Thus if you had a group of people in a plan and they all retired at the same time, no new contributions would need to be made after they retired, and no money would be left over after they all passed away.

In this perfect scenario the retirement benefits of workers are paid entirely while they’re working by the company or tax payer, thus matching the expense with those (hopefully) receiving a service. In a properly funded pension plan, there’s no spike in costs when everyone retires because you’ve set aside money for that time. This is very different from a pay-as-you-go plan (pay-go) such as social security, which can see huge swings in expenditures depending on the number of those retired. While public and private pension plans are typically fully funded, retiree medical is sometimes funded differently - not quite pay-go, almost more of a hybrid system.

Since we live in the real world, the discount rates that are chosen are not perfect. A discount rate that turns out to be too high (investments came in lower) will mean the plan will be underfunded as people begin to retire. This means that future taxpayers are paying for a service that was rendered in the past. A discount rate set too low means the opposite – the fund will end up with extra dollars and past taxpayers subsidize future retirees.

What the discount rate should be and how it should be set is subject of some debate now. The primary issue is that public pension plans – those run by a government entity – are using discount rates far higher than private ones. This leads to claims (which I have made in this thread) that the discount rate has been pushed up for political reasons to benefit past constituents at the expense of future voters. Many actuaries feel the same. However there are actuaries that feel these discount rates are justified. Unsurprisingly, the difference largely depends on who they work for, with those working in pensions being in the latter group. Similarly, there are economists (such as Dean Baker) who will defend the high discount rates of public plans, and some that won’t. The ones that do are almost inevitably on the more liberal side of the spectrum, but there are likely exceptions (I’m not aware of one).

The discount rate doesn’t determine benefits, but it is certainly used in initial plan design to help determine what they should be, and changes in the discount rate can be used to justify increasing or decreasing benefits. Furthermore, changing the discount rate directly impacts current financials. This could be one reason for arguing to legislatively set the discount rate in public entities, as opposed to actuaries choosing a new one each year – it helps avoid big swings in contribution levels. I don’t find that convincing, but some do.

Some disclosure: I have worked in insurance as an actuarial analyst for several years. I do not work in pensions. I am not an actuary, though I will likely be one early next year (here's hoping. . .). I posted a link earlier in this thread where there are many other opinions worth considering, including a few that are very different than mine.

 

[turbo]

Returns on investments are never guaranteed. The issue is who assumes the risk - the state or the employees. With 401(k), etc, it's the employee that assumes the risk of a bad economy reducing the growth of their funds. With definied benefits, the employer agreed to assume that risk.

That's not a position about whether the employer should have offered to assume the risk in the first place. It's a position about making an agreement and then modifying it after the fact when it didn't turn out as well as you hoped.

A common refrain these days is that those "greedy unions" are causing this problem. In our "liberal" media, we rarely hear that actuaries failed to properly calculate the long-term costs of such defined benefits. We also don't hear about how the Wall Street's machinations stripped the future value out of the investments that were supposed to provide the income to support the defined benefit plans. Nope, in the major media outlets, those greedy unions caused this.

I realize that the attention-spans of most citizens are too short (and perhaps their comprehension of basic economics is too limited) to make such a story compelling. Still, the major networks ought to cover this. It's pretty easy to blame the unions covering teachers, firefighters, police, state clerical staff, etc, because some people at both the top and the bottom of the economic spectrum are resentful of defined benefits promised to them.

 

[WhoWee]

A common refrain these days is that those "greedy unions" are causing this problem. In our "liberal" media, we rarely hear that actuaries failed to properly calculate the long-term costs of such defined benefits. We also don't hear about how the Wall Street's machinations stripped the future value out of the investments that were supposed to provide the income to support the defined benefit plans. Nope, in the major media outlets, those greedy unions caused this.

I realize that the attention-spans of most citizens are too short (and perhaps their comprehension of basic economics is too limited) to make such a story compelling. Still, the major networks ought to cover this. It's pretty easy to blame the unions covering teachers, firefighters, police, state clerical staff, etc, because some people at both the top and the bottom of the economic spectrum are resentful of defined benefits promised to them.

Who do we blame for a $3.6 Billion obligation funded with $27 Million?
http://www.wpri.com/generic/target_12/probing

 

[DoggerDan]

Anyone checked here, yet? http://www.usdebtclock.org/state-debt-clocks/state-of-rhode-island-debt-clock.html

They've about the same figures as CA and CO, but the number of people on food stamps is twice the ratio of CA.

 

[rhody]

Anyone checked here, yet? http://www.usdebtclock.org/state-debt-clocks/state-of-rhode-island-debt-clock.html

They've about the same figures as CA and CO, but the number of people on food stamps is twice the ratio of CA.

DoggerDan,

I did a little digging and found the source of the Debt Clock here, from ZFacts.com. BTW, How did you happen to find this, google search ?

Who’s behind zFacts, oil companies or what? Nope. I’m Steve Stoft and this is my web site. I’m building it with a little help from my friends and volunteers, but so far, it’s mostly my work. I’m a Ph.D. economist and my day job is consulting for electricity markets—California, PJM, ISO-NE. That provides 99.9% of the funding for this site. (Google ads are now providing about $12 / day). My professional website is stoft.com, my blog is zReason.

What are your biases? At heart, I’m a scientist; that means I’m a skeptic. I don’t trust easy answers especially from politicians. I also don’t trust extremists, either left or right. But I don’t think these are biases; they’re based on observation. It’s hard to know your own biases, but I believe openness, information, and clear thinking are helpful—maybe those are my bias.

Why are you building zFacts? I like to figure things out, and I don’t like deceptions or misunderstandings, especially ones that harm people. So with zFacts, I get to investigate many of my interests and perhaps expose some deceptions and clear up some misperceptions

and

Who's Helping with zFacts?
Steve Stoft: Site owner, programmer, site organizer. National debt, neocons, social security, unemployment, ethanol, gas prices, hurricanes, global warming. (CA, MA)

Pamela: Project strategist. Retirement policy specialist and lawyer. (CA, MA)

Sarah: Quotes, scandals, global warming. (CA)

Dan: Environmentalist, programmer and economist. (CA)

Al Marshall: Physicist and Nuclear Engineering, recently retired from Sandia National Laboratory. (NM)

Peter: Animator, editor. (OR)

They also have state and world debt clocks, available http://www.usdebtclock.org/index.html" :

Rhody...

 

[Locrian]

In our "liberal" media, we rarely hear that actuaries failed to properly calculate the long-term costs of such defined benefits.

Because there's very little reason to think this has contributed to the problem. You have some isolated cases where courts have decided there were errors made in the past, but there is often a great deal of grey area around them (who is responsible for misinformation that was given to the consulting shop twenty years ago, for instance), and they don't add up to anything significant in the scheme of things.

Maybe you should expand on this statement and see if you can create an argument it is true (edit, really we want to know if it is significant. Of course someone somewhere made a mistake once. The question is, can you create an argument it matters).

 

[Locrian]

We also don't hear about how the Wall Street's machinations stripped the future value out of the investments that were supposed to provide the income to support the defined benefit plans.

Well, one thing you could do is compare the financial plight of private sector pensions with public sector pensions. Neither is good, but one may be worse than the other, and you could look at their investments and funding levels before and after our recent financial disaster to see how different policies have performed. I assume since you are upset with the media for not having done this, you have some information on it.

I would like to say I agree with your sentiment re the union scapegoating. Everyone seems to be coming into this conversation with their ideological sticks out, ready to get beating. There is precious little discourse on execution. I've complained about this a couple of times in this thread.

Maybe you could help me understand how your post improves on this.

 

[turbo]

Well, one thing you could do is compare the financial plight of private sector pensions with public sector pensions. Neither is good, but one may be worse than the other, and you could look at their investments and funding levels before and after our recent financial disaster to see how different policies have performed. I assume since you are upset with the media for not having done this, you have some information on it.

I would like to say I agree with your sentiment re the union scapegoating. Everyone seems to be coming into this conversation with their ideological sticks out, ready to get beating. There is precious little discourse on execution. I've complained about this a couple of times in this thread.

Maybe you could help me understand how your post improves on this.

Well, let me tell you what I'm doing. I'm riding out this wave of crap, hoping that my IRA will regain some value, and hoping that the Fed doesn't engage in another round of "quantitative easing", which is just another term for shoveling free money at Wall Street to keep the stock market from tanking in the short term. My wife has a 401K and I have a roll-over IRA that we had hoped would keep producing income for us as we retire (soon). We also have a large money-market account that is earning only about a half of a percent per year in interest because the Fed keeps shoveling free money at the banks, so they don't have to pay savers anything. In the past 30 years or so, big-money interests have taken over economic policy in DC to the extent that it will be very difficult for the next generation(s) to save enough money to even climb into what we now consider the middle-class.

 

[Locrian]

http://www.washingtonpost.com/business/lawmakers-in-tiny-ri-poised-to-act-on-one-of-the-largest-pension-problems-in-the-us/2011/11/17/gIQA1jjSTN_story.html

PROVIDENCE, R.I. — Despite jeers and the threat of a union lawsuit, Rhode Island lawmakers on Thursday approved sweeping changes to one of the nation’s most underfunded public pension systems.

The state’s heavily Democratic General Assembly defied its traditional union allies to pass the landmark changes. The legislation is designed to save billions of dollars by backing away from promises to state and municipal workers that lawmakers say the state can no longer afford.

Lawmakers said Thursday’s vote was one of the most wrenching they’ve had to cast, though the fight might not be over if unions follow through with promised lawsuits.

“It would certainly be a lot easier to walk away from this reform,” said Senate President Teresa Paiva Weed, D-Newport. “However, it is clear that doing nothing only puts our retirees’ and our active members’ benefits at greater risk. We owe it to them, as well as to all other taxpayers, to attack this challenge head on.”

Gov. Lincoln Chafee, an independent and one of the bill’s original authors, said he will sign the bill.

Hat tip to the AO thread I linked earlier.

 

[rhody]

http://247wallst.com/2011/11/28/best-and-worst-run-states-in-america-an-analysis-of-all-50/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+247WallSt_popular+%28247+Wall+Street+-+Most+Popular%29

To determine how well — or how poorly — a state is run, 24/7 Wall St. weighed each state’s financial health based on factors including credit score and debt. We also evaluated how a state uses its resources to provide its residents with high living standards, reviewing dimensions such as health insurance, employment rate, low crime and a good education. We considered hundreds of data sets and chose what we considered to be the 10 most important measurements of financial and government management.

This year, as a new component of our analysis, 24/7 Wall St. obtained additional budget data for each state. Examining the state’s revenue and expenditures, and what each government opted to spend money on, allowed us to determine if a state overspent limited resources, failed to devote funds to an urgent need of its citizens or spent a great deal of money but with poor results. While we did not use expenditures or revenue in our ranking, these numbers reflect how a state is managed. Together with other budget data, living standards and government services, it provided a complete picture of the management of each state. A fuller accounting of our methodology can be found at the end of the article.

The 24/7 Wall St. Best and Worst Run States is meant to be an analysis that will focus the debate about state management and financial operations. The analysis should also serve to empower and inform citizens who want who want to better understand the impact government decisions have on each state.

Guess where little Rhody places, 48th ! (Fiscal year 2009) Little Rhody has an average debt per capita of about $ 8800, only Alaska ($ 9400) and Massachusetts ($ 12300) are higher.

Debt Chart

Rhody...

 

[Locrian]

http://www.wpri.com/dpp/news/local_news/providence/prov-pensions-hit-by-comedy-of-errors?

PROVIDENCE, R.I. (WPRI) - Providence's pension system has been around for 88 years, but the bulk of its huge funding shortfall stems from "a comedy of errors" that took place between 1983 and the mid-1990s, a former city official said Monday.

The General Assembly created and controlled Providence's pension system from its creation in 1923 until the city got home rule in 1983. But the decade that followed saw a series of mistakes that have now thrown it into financial jeopardy, former City Solicitor Charles Mansolillo told a special City Council subcommittee studying the problem.

6% COLA! They note an actuary said it was affordable. It would be interesting to know how he or she came to that conclusion, and what discount rate they were being forced to use when it happened. . .

Who else would love a 6% COLA? Having my salary triple in 20 years would be quite an achievement.

 

[rhody]

As if this statistic was not predictable, Rhode Island has fastest population decline in US.

New 2011 census numbers released Wednesday show that Rhode Island's population decreased by 1,300 people from April 2010 to July of this year, a decline of .12 percent

and

Two other states -- Michigan and Maine -- also lost population but at a slower rate. Overall, the U.S. population grew by 2.8 million, reaching 311.6 million people. Growth was fastest in Washington D.C., Texas and Utah.

and

"We're traditionally first into a recession and last out," said Chafee, an independent. "That's contributing to this. People are going elsewhere to work."

Add to this fact we have 5 other major cities in danger of going bankrupt, and a lack of leadership by our Governor, and we have the all the ingredients we need to keep us down. It is frustrating and maddening at the same time. What ever happened to our "Can do" American spirit ? In this state, it is nowhere to be found.

Rhody...

 

[rhody]

Issues to watch in 2012 RI session

Insight into what is on the mind of our state legislators and Governor.

TAXES: Gov. Lincoln Chafee has said he is considering a proposal to raise taxes to help eliminate the deficit without deep cuts to government programs. But lawmakers facing re-election this fall may be wary of even a small tax hike.

He tried to make this fly at the beginning of his term in 2010 and was shot down by the house/senate. I doubt it will p assif he proposes it again. He does not live the life of an average taxpayer, and seems not to "get it", or simply doesn't care. There is no way to tell.

Rhody...

 

[mheslep]

Issues to watch in 2012 RI session

Insight into what is on the mind of our state legislators and Governor.

He tried to make this fly at the beginning of his term in 2010 and was shot down by the house/senate. I doubt it will p assif he proposes it again. He does not live the life of an average taxpayer, and seems not to "get it", or simply doesn't care. There is no way to tell.

Rhody...

Fastest rate of population decrease of any state, what does the governor say? Raise taxes!

 

[rhody]

Fastest rate of population decrease of any state, what does the governor say? Raise taxes!

mheslep,

You really don't want me to answer that do you, really ? Like I said in my last post his ideas in many ways do not represent the average citizen of our state. He was elected with a 33% margin, and now enjoys a 27% approval rating state wide.

Rhody...

 

[mheslep]

mheslep,

You really don't want me to answer that do you, really ? Like I said in my last post his ideas in many ways do not represent the average citizen of our state. He was elected with a 33% margin, and now enjoys a 27% approval rating state wide.

Rhody...

No reply necessary; that was just my comment on the disappointing Chafee.

 

[Locrian]

http://blogs.wpri.com/2012/01/25/chart-the-decline-and-fall-of-the-providence-pension-system/

Hat tip AO.

 

[Locrian]

http://blogs.wpri.com/2012/02/22/prof-providence-retirees-may-face-73-haircut-in-bankruptcy/comment-page-1/

Not a lot new in this one, but it discusses a looming question:

If Providence declares bankrupcy, how much of its pension promise does it actually have to pay?

 

[rhody]

http://blogs.wpri.com/2012/02/22/prof-providence-retirees-may-face-73-haircut-in-bankruptcy/comment-page-1/

Not a lot new in this one, but it discusses a looming question:

If Providence declares bankruptcy, how much of its pension promise does it actually have to pay?

Not sure, for sure less than 100% minus the fees the lawyers will make fighting for and defending against it. What a mess, in the end, shame on us as a society for letting this happen, it is all too common these days, not just in little Rhody.

Rhody...

 

[Locrian]

it is all too common these days, not just in little Rhody.

Absolutely. I think it is worth the occasional reminder that, while this thread is dedicated to RI, they are far from the only ones with this problem.

I sometimes ask relatives how well funded their pensions actually are. The first time they always look at me like I'm crazy.

 

[Locrian]

Public Sector Pensions: 'Their Accounting Makes Enron Look Good'

But the Rhode Island reforms -- which are being challenged in court -- are seen as a template for other cash-strapped states to model, giving rise to more fears that pension systems may not be as unshakable as once thought. "Any change will hurt," Munnell says. "If you were counting on your pension and the value is reduced, it can be a painful adjustment."

Hat tip AO.