# 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.

#### 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

Gold Member
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

#### rhody

Gold Member
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 ?

Debt Chart

Rhody... :yuck:

#### Locrian

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

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.

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#### rhody

Gold Member
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... :grumpy:

#### rhody

Gold Member
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... :grumpy:

#### mheslep

Gold Member
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... :grumpy:
Fastest rate of population decrease of any state, what does the governor say? Raise taxes!

#### rhody

Gold Member
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

Gold Member
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.

#### rhody

Gold Member
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.

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