STUMP » Articles » Rhode Island Pensions: Let's Be A Happy Family! » 5 April 2017, 05:47

Where Stu & MP spout off about everything.

Rhode Island Pensions: Let's Be A Happy Family!  

by

5 April 2017, 05:47

Rhode Island gets to be this week’s state pension to be highlighted because the state treasurer Seth Magaziner has this peachy keen idea.

I’ll let him make the case himself:

Seth Magaziner: R.I. must address sick pension plans

In recent years, Rhode Island’s financial position has improved dramatically. Our state liabilities have decreased by billions of dollars and our structural deficit has fallen by more than half. We have done this while making important investments in economic development, infrastructure and education.

As treasurer, I have taken steps to continue this progress. I have implemented a new “back-to-basics” investment strategy for the pension fund that is already improving investment performance and reducing fees. Our new “BankLocal” initiative is moving millions of dollars of state cash to local banks and credit unions to support economic activity here at home.

While these improvements are noteworthy, there is more work to do. By far the biggest financial challenge Rhode Island faces today is the condition of our municipal pension plans.

It’s hard to believe, given the small size of our state, but Rhode Island has 150 municipal pension plans. These plans provide retirement security for the hard-working municipal employees who devote their careers to serving our local communities. These employees, and the taxpayers they serve, deserve to have pension plans that are healthy and sustainable.

About three-quarters of the state’s local pension plans are part of the Municipal Employees’ Retirement System (MERS), which was established in 1957 to give municipalities the option to have their pension plans managed by the state treasury. A municipal plan that joins MERS receives the benefits of scale and professional management, which they might not be able to afford on their own. MERS also enforces fiscal responsibility, with a uniform benefit structure and a requirement that all communities make their full required pension contributions or risk losing state aid.

The result is that municipal pension plans that have joined MERS are doing well. Pension plans in MERS have a healthy 83 percent overall funding status. Benefiting from the scale and efficiencies that come with being a part of the $8 billion state pension system, municipal pension plans in MERS pay only 0.1 percent of their fund balance in administrative overhead every year.

In contrast, the 34 municipal plans that have not joined MERS carry a combined unfunded liability of $2.4 billion — roughly eight times the combined unfunded liability of the 116 plans in the MERS system.

A majority of the 34 locally-managed pension plans are critically underfunded, some as low as 15 percent. A 2013 television investigation found that the investment performance of all but two locally managed plans trailed the performance of MERS, in some cases significantly.

If left unaddressed, the consequences of Rhode Island’s locally-managed pension problems could be devastating. The rising costs of these plans are already hampering the ability of cities and towns to invest in education, fix roads and keep residents safe. The tenuous financial condition of many locally-managed pension plans also places the retirement security of municipal employees in jeopardy.

The answer is clear: More communities should consider joining MERS to improve the sustainability of their pension plans.

One reason some communities have yet to join MERS is because the rules that govern entrance into the MERS system are unnecessarily rigid. For example, communities entering MERS are currently required to adopt a 20-year schedule for paying off their pension debts, which makes sense for a well-funded plan, but can be an unrealistically short time period for a critically funded plan.

…if they can’t fill the hole in 20 years, perhaps these funds shouldn’t be jumping in the pot with well-funded plans.

(and by well-funded, they mean being able to cover already accrued liabilities over a 20-year period).

I am introducing the “Healthy Local Pensions Act” to assist struggling municipal pension plans by allowing them to access the professional management and scale advantages of MERS, while gradually implementing certain requirements of the MERS system. This plan provides short-term financial flexibility to communities along with a path to long-term pension sustainability.

My proposal is based in part on recommendations of the 2015 Local Pension & OPEB Study Commission, which included state, municipal and labor leaders. Under the Healthy Local Pensions Act, the decision for a community to join MERS would continue to be optional. Each municipality, in collaboration with its stakeholders, must decide if entering MERS is right for them.

Commonsense solutions like the Healthy Local Pensions Act will be an important step in our state’s continued progress toward stronger financial health.

Seth Magaziner, a Democrat, is the general treasurer of Rhode Island.

I assume he’s trying to follow current governor Gina Raimondo’s footsteps, who went from treasurer to governor, one way being her supposedly successful handling of state pension issues.

JUST THE FACTS

Here’s a news story on this proposed law:

Measure makes it easier for communities to merge their pension plans with the R.I. system

PROVIDENCE , R.I.— State Treasurer Seth Magaziner wants to make it easier for some of the worst performing local pension funds to join the state-run municipal retirement system.

And he says their addition – if they chose to join — would not hurt the health of the larger system.

Currently 116 local pension funds make up Rhode Island’s Municipal Employees Retirement System, which enjoys a healthy funding status of 83 percent. (Any plan 80 percent or more funded is considered healthy.)

Whups, gotta add that one to the database. Give me a moment.

Back to the story:

But 34 other locally administered plans – carrying a combined $2.4 billion in unfunded responsibilities – aren’t so lucky. Nineteen of them are below 60 percent funded, including 12 that are below 40 percent funded.

There are investment advantages to being in the larger, centralized MERS system, Magaziner said Thursday, but conforming to its standards has been difficult for some communities to do.

“What we’ve heard from some of the locally administered plans is that they would be interested in entering MERS but the rules are unnecessarily rigid.”

For instance MERS requires that pension plans — financed by both taxpayer and employee contributions – pay off their unfunded debts over a period of 20 years.

But many communities with struggling local plans have had to stretch out their funding strategies to 25 years.

MERS also offers better benefits than some local funds can match.

This is not sounding like a good idea to me.

Under Magaziner’s plan, which was filed as a bill Thursday in the House, communities would be allowed to conform to MERS standards gradually over time, therefore reaping the benefits immediately without carrying additional financial burdens.

This is not sounding better.

By joining MERS, communities with struggling retirement plans could take advantage of lower fees and overhead and enjoy a better level of investment management, said Magaziner.

But the indebtedness of each pension fund would be calculated separately and remain with the host community alone.

And because no state money would go into any of the new local pension plans, allowing them to join would not have any impact on the funding of plans already in MERS, Magaziner said.

Magaziner emphasized the bill doesn’t mandate that communities join MERS; it only gives them the option.

And once they’re in, they won’t be able to get out. Oh, did he not mention that part?

TED SIEDLE SAYS: NOT SO FAST

Here is what Ted Siedle has to say:

Rhode Islanders Gave Their State Treasurer A Cookie, Now He’s Asking For More Than A Glass of Milk

If you give a mouse a cookie, he’s going to ask for a glass of milk.

Likewise, if you give the treasurer of Rhode Island a $7 billion-plus state pension to use for his political advantage (i.e., to dole out to Wall Street campaign supporters—like his predecessor, now Governor Gina Raimondo), he’s going to want more. The “more” Seth Magaziner has set his sights upon is municipal pensions that are locally managed.

If this young investment newbie gets his little paws on all those retirement assets, it will be just what the doctor ordered — Dr. Seuss that is.

……
The “professional management” provided by hedge fund gunslingers hand-picked by Raimondo for the state pension and kept in-the-saddle by Magaziner has cost state pensioners dearly—billions over the past five years—just as Warren Buffet and other experts (including me) warned.

Magaziner promises economies of scale will be realized by merging the small municipal plans into the state pension. Unfortunately, Raimondo and Magaziner’s track record reveals that investment fees paid by the state pension have skyrocketed in recent years.

Trust Magaziner to cut municipal pension costs?

That makes as much sense as relying upon Melania Trump to slash your clothing budget. As the Donald might tweet, “Really, really bad idea.”

Nice Trump hook there, Ted.

Ted Siedle at Forbes has been on top of the Rhode Island pension mess for years, and here is just a sample (in reverse chrono order) of his pieces:

For fun, let’s look at that January Wikileaks piece:

As a father, I can understand Clinton Foundation Ira Magaziner’s wish that his 30 year old son Seth have a successful career.

It’s touching—sort of—that Pappa supported his son’s dream of becoming Rhode Island General Treasurer in 2014 by writing his well-heeled friends, as disclosed by WikiLeaks recently, asking each to donate thousands to Kid Magaziner’s campaign.

As a political insider, Pappa knew exactly how much a promising bid for state treasurer requires—approximately $500,000—and made sure his Kid got from Pappa’s friends the funds needed to succeed.

I wish all fathers could afford to give their sons the same career kickstarter.

Having Pappa Magaziner’s lifelong friend Bill Clinton campaign for his son surely helped.

However, Pappa (and pal Bill Clinton) overlooked some glaringly obvious facts about his Kid. I get that we fathers often have blind spots when it comes to our children but this case is over-the-top. Surely Pappa must have known Kid Magaziner had no meaningful experience or qualifications to manage the state’s $7.5 billion pension. Pappa must have known the state pension is in dire straits—so much so that workers and retirees had been forced to accept 3 percent annual Cost of Living (COLA) benefit cuts.
…..
During his campaign for Rhode Island General Treasurer, investment newbie Seth Magaziner (31 year old son of Bill Clinton policy advisor Ira Magaziner) promised greater transparency regarding the state pension’s high-risk, costly opaque alternative investments gamble than his predecessor, Governor Gina Raimondo.

Promises, promises. When was the last time a politician followed through on a promise of greater transparency?

And guess what? Yeah, not so much. I’ll get to that in a future post on RI pension assets.

Mind you, that’s Ted Siedle posts on Rhode Island going back to only November 2015. You can go back a lot farther with his commentary. If you are an interested party, I highly recommend doing some digging among his stuff.

QUICK TRIP TO THE PAST….2011

I will be taking a look at Rhode Island pension assets and liabilities in upcoming posts.

Rhode Island was one of the first “surprise” poorly performing pension areas I came across when I started digging into public pension problems in 2008 (what timing).

When I started, I knew Illinois and New Jersey were abysmal, but I didn’t realize Rhode Island (as a state) was so bad that they really did have the first adjustment-in-retirement public pension “solution”.

The adjustment-downward was simply cutting of COLAS, not cutting the base amounts (yet). There have been loads of lawsuits, and I will go back and dig into those in my records (which go back to 2008, as mentioned). The most notorious Rhode Island pension situation was Central Falls, and I’ll let this July 2011 NYT piece provide some facts:

The small city of Central Falls, R.I., appears to be headed for a rare municipal bankruptcy filing, and state officials are rushing to keep its woes from overwhelming the struggling state.

The impoverished city, operating under a receiver for a year, has promised $80 million worth of retirement benefits to 214 police officers and firefighters, far more than it can afford. Those workers’ pension fund will probably run out of money in October, giving Central Falls the distinction of becoming the second municipality in the United States to exhaust its pension fund, after Prichard, Ala.

….
Some of the retirees are in their 90s, and Central Falls, like many American cities, has not placed its police and firefighters in Social Security. Many have no other benefits to fall back on.

State lawmakers are trying to contain the damage, mindful that it would be a bad time for any state to seek help in Washington. Last month they rescinded an offer of state aid to Central Falls, just after Moody’s downgraded the city’s credit to “possibility of default.”

But the state still has risks related to the woes of its municipalities, risks that have gone largely unnoticed because it is not as big as, say, Illinois and California. Several other Rhode Island cities are sinking under big debt burdens. Even Providence, the capital, risks running out of cash in September, according to its auditor, and if it scrapes by until October, it must then come up with $60 million for its own municipal pension plan.

Some analysts fear that a Central Falls bankruptcy, and a whiff of other problems out there, could scare nervous investors away from bonds issued by Rhode Island’s other municipalities, perhaps setting off a chain reaction that could push the state itself to the brink. There is a precedent: the last American state to default on its bonds, Arkansas in 1933, got in over its head by trying to help struggling municipalities.

…..
Rhode Island has an investment-grade credit rating, but it is in no position to bail out a string of teetering cities, or take over their shaky local pension funds the way the federal government does when some companies go bankrupt. The state treasurer, Gina M. Raimondo now governor, says Rhode Island must first stabilize its own pension fund, which continues to require more and more cash each year, despite four overhauls since 2005 that were supposed to get the cost under control. The Securities and Exchange Commission is investigating. If the state turns out to have understated its commitments, it could deliver a new jolt to bond markets still nervous after two traumatic years.

I am not going to go into the whole timeline right now, but one of the things that happened was that the state passed a law so that bondholders got first cut, not pensions:

Bonds Trump Pensions in Rhode Island
A new law puts investors first — to save the system.

BY: GIRARD MILLER, GIRARD MILLER | AUGUST 11, 2011

Facing the prospect of a statewide financial crisis arising from Central Falls’ bankruptcy case, the Rhode Island Legislature took steps to assure municipal bond investors that their interests will not be impaired by pensioner’s claims. The new law enables the city’s receiver to subordinate the pensioners’ claims to bondholders, with chilling implications for public pensioners and employees who typically regard their claims to be ironclad by law as well as in the court of public opinion.

Again, there has been litigation and politicking all over the place, but so far, this law has stuck, as far as I know.

[Also, I don’t know why Girard Miller is listed twice on the article… if you click through, you’ll see his profile pic is there twice as well.]

There are two pension funds listed in the Public Plans database – the state ERS and the Municipal Fund. I will be looking at both, and consider the state’s credibility in trying to lure some small plans into the state system.

Compilation of Rhode Island posts


Related Posts
A Week of Bad Pension Ideas: Just Make the Full Payments!
South Carolina Pensions: Liability Trends
Kentucky Update: Republicans Take Legislature, Pensions Still Suck, Hedge Funds to Exit