Rhode Island's General Treasurer Gina Raimondo is easily my nominee for the "Little Engine That Could" award.
Her politically courageous efforts to reform her state's broken and dramatically underfunded $14.8 billion public pension system are a high-stakes, against-the-odds example of lofty political leadership that deserves accolades. And if she succeeds, then a road map of acute sensitivity and wise choices will exist for every other Treasurer in the Union to follow.
Here are the facts -- and sobering ones they are.
Rhode Island's state pension fund now consumes 10% of every state tax dollar, and this figure is currently projected to double within just the next few years. In addition, there at least 155 (!!) municipal pension plans in Rhode Island outside the state system that are in the same dire straits. As Treasurer Raimondo recently said in describing her challenge, "Either the pension fund runs out of money or cities go bankrupt." The small town of Central Falls, north of Providence, already has failed financially.
And the root problem? Until just this year, Rhode Island calculated its pension number by assuming an average annual rate of return on its investments of 8.25% -- in fact, for the last decade its actual average return on investment was only about 2.40%. And in each of the last 10 years the state's fund paid more money to retirees than the fund collected from state employees and taxpayers combined. The same can be said of most of the many municipal funds and their towns' employees and taxpayers.
Rhode Island is a microcosm of what's wrong with the country's $3 trillion worth of public pensions plans in the aggregate, and it's truly the 'canary in the (national pension crisis) coal mine'. The state -- just like 49 other states -- made promises it didn't sufficiently fund along the way and now can't keep. That bill has come due, so to speak, and as Treasurer Raimondo describes, the state is being forced to choose among the state reneging on both past and future promises to workers, undermining its future by cutting back on investing in everything from schools to green energy to health care, or, even though in the midst of an ongoing recession, raising revenues through large tax increases.
I have met with Treasurer Raimondo, and few in the country seem as capable intellectually and policy-wise of sensitively and fairly cutting this Gordian Knot. And it took great political courage for her to step into this breach, courage of the sort we need to see more of in every State Capitol.
I particularly applaud Ms. Raimondo's outspokenness and transparency as she balances between keeping as many of the state's promises as she can while preserving the state's ability to serve its people and invest in its future. Too many other officeholders -- in Ohio and Wisconsin, just to name two states -- are using their state pension problems as an excuse to eviscerate the status and compensation of public employees and take away their rights to fair bargaining.
The proposed Rhode Island Retirement Security Act of 2011 (RIRSA) would move to a combined defined benefit and defined contribution plan that fairly spreads the market risk of the system across both taxpayers and employees. Going forward, state employees and teachers will pay a smaller amount of their paychecks into the defined benefit system, but will henceforth also contribute into their own retirement accounts. Smartly, until the entire system is again financially healthy and at actuarially acceptable funding levels -- i.e., no more 8% 'gaps' between assumed and actual returns on investments -- cost of living adjustments or COLAs will be suspended. And to put the state properly behind the reforms, protections similar to those now found in the Federal Pension Protection Act will be the "law of the state". Finally, vitally important albeit somewhat nuanced, there will be self-correcting mechanisms to ensure that Rhode Island never faces this challenge again.
The only place I disagree with the Treasurer is in moving the retirement age past 65, which is the same recommendation which the so-called "Deficit Commission" made last November related to Social Security.
The premise behind the recommendation to increase the retirement age from 65 to 68 or 69 -- namely, that average life expectancy is rising -- may sound OK but in fact it is flawed in the extreme and equally insensitive. While life expectancy is indeed rising, it's doing so mainly for high earners who least need pension plans (and Social Security) -- for those in the bottom half of the income distribution, which includes the preponderance of state workers, life expectancy hasn't budged for 30 years. A better alternative -- for the states and for federal Social Security -- is to eliminate any caps on taxable wages beyond which self contributions to either a pension plan or Social Security cease. (In the case of Social Security, rather than (again) penalizing the hardest working Americans there should also be "means testing" so that only those individuals who need it get it.)
But this suggested alternative is just one nit to an otherwise perfectly fair solution to the unprecedented financial crisis confronting Rhode Island. Even though the state's public employees and retirees must feel betrayed as they are asked to concede some of what had been promised to them, they must understand that it was those who made the promises and then administered the plans with faulty assumptions who let them down.
And when RIRSA, or something very close to it, is enacted by the Legislature, then Rhode Island really will be the "Little Engine That Could".
Leo Hindery Jr. is chair of the US Economy/Smart Globalization Initiative at the New America Foundation, co-chair (with Leo Gerard) of The Task Force on Jobs Creation, founder of Jobs First 2012, and a member of the Council on Foreign Relations. He is the former CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. and Liberty Media, and is currently an investor in media companies.
Follow Leo Hindery, Jr. on Twitter: www.twitter.com/leohindery
So, understand that the plan is properly being fixed, sans going far enough to enable muncipalities a similar amount of relief and ultimately not correcting things fast enough, while at the same time reamortizing debt (one again) to future generations of Rhode Islanders.
Perhaps you should do a little homework and see that thousands of Rhode Islanders, including most all human service agencies are supporting comphrehensive pension reform as it will help to starve off another muncipal (if not several) bankruptcy in our small, union-encumbered state.
In Rhode Island we have almost no Republicans. We just have Democrats of all shades. Just because someone is a "Democrat" doesn't mean they're not "Tea Party" too.
Raimondo is a millionaire financier who the New York Times said "has been criticized for being too close to Wall Street." Since she started this, Wall Street dumped $200k in her lap last week without so much as a fundraiser. Now she's ramrodding through legislation full of errors.
http://blogs.wpri.com/2011/11/08/raimondos-office-admits-second-error-in-pension-testimony/
Get the facts straight before you write a story!
http://news.providencejournal.com/breaking-news/2011/11/members-of-publ.html
Public servants having better salaries and benefits than those they serve
can only lead to one thing
revolt.
At the very least - it should be indexed.
My parents are now multimillionaires. They are worth $10 - 15,000,000, depending upon the fluctuations of the stock market. They had the good sense not to trust that a state pension plan or any private pension plan would be good custodians of their money. They learned to look after their own money. They had no special knowledge or plan. They simply invested 10% of their income in prime stocks and mutual funds, before there were 401k's. Their private income is now about $300,000 to $400,000 a year.
The state pension plan, which took 60% more money, gives them only 10% of their yearly income and gives them no wealth. When they die, their measley 10% income from the pension plan dies, too. But their $10,000,000 wealth goes to their heirs, along with the $300,000 to $400,000 yearly income.
What's the lesson here? Don't trust anyone to look out for you. Don't trust anyone to be a fiduciary for you. If you are forced to pay into a pension plan, assume that they will not do well for you. Only you can look after your own money and if you won't learn to look after your own money, then don't complain about what other fools do with your money.
People need to learn to plan, fund and operate their own wealth and investments. Too many people rely on others. NO ONE looks out for you as well as you look out for yourself.
The current recession was brought on by others having far too much control over the finances of the country, from the government taxing, spending, borrowing too much, to Wall Street getting into financial bed with the government, colluding with them, legally, but immorally. Both government and Wall Street mismanaged our country's finances. It isn't only Wall Street, but also the incompetence of government financial people and regulators. Government couldn't be as big as it is without Wall Street and Wall Street would be a lot smaller and less worrisome if government didn't use it to funds it operations and debt.
Tarring and feathering and being run out of town on a rail were popular in the past. Maybe we should consider bringing them back?
25 years that the pension fund has been invested. Yes, that includes the meager returns of the
last 10 years. I don't hear any talk of increasing pensions when the returns are greater than
8.25%.
These are long-term investment funds. Noone has any idea what the returns will be in 5, 10,
20 years. 8.25% was chosen based upon historical data, In MA anyway, that guesstimate
was fairly accurate. The biggest reason that these funds are short is that states too frequently
have not made their contributions.
1. First no - the only reason that the 60/40 stock/bond portfolio performed at over 9% was due to the greatest bond market rally EVER, allowing double digit returns from the 40% portfon of the portfolio. Do the math going forward at 3% on 40% of the portfolio.
2. Next one - Look at the returns of equities and bonds (any combination of such) in the 60's and 70's. Rydex has a popular study that shows no combination produced positive returns.
3. Next - As personal, corporate and government deleveraging continues along with incredibly high corporate taxes versus the rest of the world, more US companies will have difficulty competiting globally, combined with the adverse effects of Dodd-Frank and other heavy-hand policies, including Obamacare, corporate earnings, which drive stock prices will suffer.
4. Next - Contributions have all been made.
Where was the Political courage, not to mention the actuaries and Public Accountants who allowed the State's fiduciary responsibility with respect to Pension funds go unfilled?
The Politicians knowingly assumed away any responsibility to fund the pensions as agreed to by law. They "management" assumed an annual rate of return of 8.25%. Even without the benefit of hindsight a ridiculous and unrealistic assumption.
Now the Politicians are blaming the Pensions (Public employees, teachers, etc.) for their own (elected representatives) negligence both past and present. The State governments made the political decision to abrogate their responsibilities, both financial and fiduciary by refusing to fund their obligations, choosing to confect the numbers and then run election campaigns of lower taxes. They absolutely knew what they were doing was incongruent with their responsibilities.
There is nothing heroic, courageous or of other virtuous traits in what Rhode Island is doing.
In fact, it is quite the opposite as now the politicians are preparing the nation wide campaign to scapegoat, frame and punish the innocent for their own benefit.
ROTFL
"The state ... made promises it didn't sufficiently fund along the way and now CAN'T KEEP" (emphasis added)
Gee, you mean the government LIED? Say it's not so!
There you have it in plain language. No matter how many union protests and sit-ins you stage, these promises were unrealistic to begin with, and the people that made them were either liars or idiots. I credit the author for pointing out that all 49 other states are in the same boat.
We're in the EXACT same situation with Medicare, and to a lesser extent SS. There is simply not enough wealth in the private sector to keep all of the promises that the politicians have made.
I really have to salute Ms. Raimondo for trying to slow down this looming train wreck. We need someone with this sort of courage to call out the lies that the Federal government has been telling the population for 40+ years.
Calling an assumption of perpetual 8..25% growth "unrealistic" is using polite terms. That assumption is so ridiculous that it should be called a LIE.
Keeping promises that were based on a false assumption will not be possible.