How Easily the Hybrid Pension Reform Can Be Undone

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In his Sunday Providence Journal column, Assistant Managing Editor for business, commerce, and consumer issues John Kostrzewa describes the business community’s enthusiasm for the just-passed pension reform:

There was a lot to celebrate because many of the 700 businessmen and women who attended the [Providence Chamber of Commerce] dinner had contributed their money, influence and support to back the reform effort that had been heavily opposed by the labor unions.  It showed that when the business lobby is committed, organized and focused, it can be a potent force in setting public policy.

Myself, I continue to be skeptical that the field broke so cleanly into opposing sides.  That is, I’m not so sure Business faced Union and won a battle, with pension reform.

A few years ago, during teacher contract negotiations in Tiverton, National Education Association Rhode Island Assistant Executive Director Patrick Crowley put forward a proposal for health savings accounts — which are typically seen as key components of serious conservative healthcare reform plans.  A close look revealed that the union’s plan was constructed in such a way that the reform would hardly have saved money, yet it enabled negotiators to proclaim savings with the health benefit so as to argue for other increases, as in salary.  The lesson that stuck with me is that unions are willing to seize on the trappings of reform, but they’ll, first, force reformers to negotiate something, like raises, in order to insert their favored concepts into a contract and, second, work to dilute the effect of the reform of itself.

General Treasurer Gina Raimondo has successfully brought the notion of a defined-benefit/defined-contribution hybrid to the Rhode Island public-sector pension system, but reformers arguably didn’t do enough to ensure that it would be a strong win, and it’s beginning to look like other concessions made in the process may very well outweigh the improvements.  The new 5.5% privatization tax that the General Assembly imposed on state (and perhaps municipal) government was likely a mere first taste, especially if NEA-RI President Larry Purtill’s exhortations are any indication.

The quantitative question that naturally follows such predictions is:  Just how much would it take to undo the benefit of a reform like the hybrid system?  Well, for starters, I’ve already pointed out that the hybrid benefit is more costly than the defined-benefit system alone, if the actuaries’ investment assumptions hold.  Regardless of investment returns, however, it won’t take much at all for the unions to negate the “hit” that they’ve taken with the hybrid through advantageous policies in other areas.  If legislators and other government officials seek to mitigate the backlash from the unions by offering such juicy concession prizes as the privatization tax and binding arbitration, the reform could easily turn into a recidivistic windfall for public employees.

For example, if we assume that the average teacher will work for 25 years and retire for 20, the unions will only have to increase the average annual raise by 2.76% to leave their members retiring with exactly the same defined-benefit pension.  In other words, if teachers’ typical annual raise is 4% (which is the state actuaries’ assumption) and the unions bring that up to 6.76%, a 25-year teacher will see no change in defined-benefit pension whatsoever.

For state workers, the necessary delta is 2.73%.  For teachers and state workers who stay on the job for 30 years, which will be much more common, given increases in minimum retirement age, the delta to erase the effects of the hybrid reform is 2.5%.

That doesn’t tell the whole story, obviously.  Most important, if the unions manage to procure higher salaries for members, then the reward far exceeds the increased pensions, as employees bring home more money each year of work.  The hybrid plan also lowered the amount that employees contribute to defined-benefit portion of their retirements, which provides 5% or more in annual savings for them, and added a 1%-of-payroll employer payment into the defined-contribution portion, which amounts to a 1% raise deposited into a high-yield savings account for future use.  On the other end of the scale, one has to factor in variations in cost of living adjustments (COLAs) based on the size of base pensions.

Taking all of those variables into account, a teacher who works for 25 years and retires for 20 only needs his or her annual raise to be 0.89% higher than it otherwise would have been in order to completely eliminate the adverse effects of the hybrid reform over the course of his or her career and retirement.  If he or she works for 30 years and retires for 15, that delta drops to 0.68%.  For state workers, the parallel numbers are 0.92% and 0.71%.

That is, if the expected 4% annual increase in teacher pay becomes 4.68% based on concessions to the unions, the combined compensation from salary and pension will exactly equal what it would have been had the hybrid reform and the concessions never occurred.  Keep in mind that this doesn’t include the five percent of salary that employees will be putting in their defined-contribution plans or the investment yields from those plans, from both employee and employer contributions.

Of course, it will be all but impossible to tell whether this effect was actually obtained.  The economy might force the average annual raise for state workers down to 3%, but if, for example, the privatization tax prevents the pressure of competition from driving it down to 2%, then public workers would have ultimately benefited from wave of reform.  (And, yes, it’s tautological to note that taxpayers would have lost out.)

If the business community really does have pull at the State House, then it ought to apply its strength to resist any additional giveaways that legislators are planning to offer unions to buy forgiveness of their pension votes.  Next it ought to strive to repeal the privatization tax as well as the provision of the pension reform that puts future adjustments in the hands of the union-heavy Retirement Board.  Otherwise, any celebrations over the General Assembly’s 2011 special session on pensions will soon prove unjustified.

Pension Reform Bait-and-Switch to Block Broader Reform

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An observer of Rhode Island’s political scene needn’t be excessively cynical to be a bit disconcerted by the unity of purpose displayed toward the end of the General Assembly’s special session on pension reform.  Leading Democrats, including some who double as labor union leaders, were onboard.  The union-backed Independent governor, Lincoln Chafee, was onboard.  From the opposing camp, various good government groups were onboard, almost in unity.

Even the ostensibly neutral media joined the parade.  After an overwhelming vote passed the legislation, the Providence Journal editorial board dubbed the achievement as “Rhode Island rescued.”  An analysis by WPRI’s Ted Nesi called the bill, “an extraordinary — and unlikely — achievement for the three leaders most responsible for shepherding it through.”

Two questions arise from this sea of consensus:  Is it really plausible that the combination of budgetary crisis and strong leadership changed the legislature’s stripes so dramatically as to make it a national example of forward-thinking government?  And should we worry that the issue’s momentum carried forward catches and promises that will ultimately harm the state?

An initial answer comes in the form of the last-minute amendment creating a 5.5% “assessment” (aka “tax”) on privatized workers.

A Long-Running Union/Assembly Goal

Back in 2007, as June 15 turned into June 16, Rep. Charlene Lima (D, Cranston) slipped a midnight amendment into the budget bill that would pass before the sun came up.  The amendment created RI General Law 42-148, “Privatization of State Services,” which requires an elaborate review and appeals process before the state can use private contractors for services previously performed by unionized public employees.

The legislation made its appearance in the midst of efforts by Governor Donald Carcieri to address the state’s structural deficits through such privatization, and within a week, his efforts ended.  As Carcieri spokesman Jeff Neal put it, “Bringing competition to the delivery of state services is one of the key ways Rhode Island will be able to fix its budget problems.  Unfortunately, it appears that solution is off the table now.”  The final nail came a year later, when the state Supreme Court declined to review the constitutionality of the law.

In essence, the legislation required a cost-comparison analysis that would pit the private contractor’s bid (plus all remaining inside and transition costs) against an optimistic “new cost estimate” from union workers, “reflecting any innovations that they could incorporate into the work performance standards.”  (Not that the law required them ever to implement the innovations.)  In order to win the contest, the outside vendor would have to offer “substantial” savings; in her initial legislation, Lima used the margin of 10%.  State workers and their unions could then use an appeals process to delay the contract award for months.

Fast forward to November 2011.  As the pension reform legislation moved toward stunningly smooth passage, the following language slipped into the mix, amidst a variety of “technical amendments”:

42-149-3.1. Assessment on state expenditures for non-state employee services. – Whenever a department, commission, board, council, agency or public corporation incurs expenditures through contracts or agreements by which a nongovernmental person or entity agrees to provide services which are substantially similar to and in lieu of services hereto fore provided, in whole or in part, by regular employees of the department, commission, board, council, agency or public corporation covered by chapter 36-8, those expenditures shall be subject to an assessment equal to five and one-half percent (5.5%) of the cost of the service. That assessment shall be paid to the retirement system on a quarterly basis in accordance with subsection 36-10-2(e).

Government leaders are quite open about the intention behind the new statute.  House Speaker Gordon Fox (D, Providence) has acknowledged it as an effort to prevent future governors from returning to Carcieri’s methods.  Richard Licht, director of the Department of Administration for the current governor, told WRNI’s Ian Donnis that “the purpose of it” is to “curb the state’s use of outside employees.”

Whatever “substantial savings” might have meant under Lima’s legislation, they now must overcome an additional 5.5% handicap, and as the state’s structural deficits continue, government officials will be nudged even more strongly toward tax increases and/or service reductions.

A Tax for the Pension System

The secondary effect of the 5.5% provision is, obviously, to introduce another taxpayer stream of revenue for the pension system.  The amount that state entities spend on contract employees is not readily available, but Licht puts the annual revenue to the pension system at a projected $2 million (though he admits that no thorough analysis has been performed).

In the context of the pension reform, however, dollar amounts have typically been described in terms of the amortization period.  That is, in the 25 years that it is supposed to take for the pension system to be sufficiently funded, this last-minute money grab will amount to around $50 million paid from the state’s general revenue.

Or Something More Insidious?

Whatever the dollar amounts, a key difference between this latest scheme and the Lima amendment should not be overlooked.  The definitions section of the 2007 law defines “in-house” services as those involving “in-house state programs and employees.”  Section 3 of the law explicitly begins the review process “prior to the closure, consolidation or privatization of any state facility, function or program.”

The new law is not so carefully limited.  It describes the included services as those provided by employees covered by RI General Law 36-8, which establishes the state pension system.  That system is not limited to state workers.  Indeed, subsection 36-10-2(e), which the new law cites for the process of payment, refers to state contributions to teachers’ pensions, as well as state workers’ pensions.  Depending how enthusiastically the various parties wish to press their advantage, it may turn out that the 5.5% assessment applies to contractors hired to perform any service “similar to or in lieu of” any employee in the pension system, whether employed by the state, a school district, or a municipality.

The most financially and politically significant example that comes to mind is that of charter schools.  In general, teachers in such schools are required by state law to participate in the retirement system, but mayoral academies can opt out.  If they do so, will their budgets be subjected to the 5.5% assessment?  Given the fact that the last-minute amendment was not thoroughly vetted before submittal nor thoroughly debated before being voted into law, that may very well be the case.

Pension Reform as a Barrier to Broader Reform

I’ve been arguing against General Treasurer Gina Raimondo’s pension reform on the grounds that it (1) is insufficient by several orders of magnitude to solve the entire problem, and (2) puts future adjustments and reforms fully in the hands of the state Retirement Board, with seven of 15 members appointed directly by unions.  Even when agreeing, supporters of the legislation have proclaimed it as a huge step in the right direction.

The privatization tax may be an early indication that crisis and leadership only yielded a quarter step forward, soon to be followed by four steps back.  At the very least, the state has one less tool to rein in its structural deficits, and the restriction may apply to any other government entity in Rhode Island that participates in the pension system but wishes to explore privatization.

The scope may broaden even more (and more definitively) if reform of municipal pensions brings additional public employees within reach of General Law 36-8.  And reformers would do well also to ponder the relevance of this latest General Assembly bait-and-switch while advocating for another of their favorite notions:  consolidation.  Bringing local services under the purview of state employees will virtually ensure that they remain forever “in house.”

Beyond all of this speculation is the likelihood that the amendment was just the first surprise that helped buy such broad assent and smooth passage for the bill.  It isn’t cynical at all to observe that, whatever else it might be, Rhode Island’s entrenched establishment is sufficiently savvy to see when basic math threatens the application of reality to unrealistic benefits and to make the best of reforms… and with a vengeance.

Task Force ProJo OpEd: Alarming Outlook for Municipalities, even w/ Pension Reform

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As part of our Center’s special pension Task Force, Eileen Norcross from the Mercatus Center, followed up on her recent report by publising an OpEd that appeared in the Nov. 17 Providence Journal, and co-authored by Benjamin VanMetre.

***

Even with reform, R.I. outlook alarming

by EILEEN NORCROSS and BENJAMIN VanMETRE

FALLS CHURCH, Va. – The heated debate over how to fix Rhode Island’s pension system — with votes in the General Assembly scheduled for today — begins with a basic question: Just how big are public-sector pension promises?

According to the state’s numbers, Rhode Island is facing a daunting $9.3 billion in unfunded liabilities, and there is no money set aside to pay for them. Unfortunately, like all public-sector plans in the country, the picture is actually much worse. Rhode Island’s unfunded pension liabilities are nearly twice that size, closer to $18 billion — and that’s on the lower end of estimates.

Rhode Island, like many other state and local governments, misses the mark on calculating its pension liabilities because they are being valued as though they are risky bets instead of a government-guaranteed benefit.

This miscalculation comes from poor government accounting rules …

Read the entire ProJo OpEd here

A Tale of Two States: MICHIGAN vs ILLINOIS, lessons in pension reform

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As part of our Center’s special pension Task Force, Jonathan Williams teamed up with RI Representative Jon D. Brien to publish this compelling piece that discusses how different pension reform decisions by Michigan and Illinois should make clear the path Rhode Island should take as our General Assembly considers the historic pension reform bill before it. 

Read the Press Release here …

Visit our Pension Reform webpage here …

Pension Reform Key for Rhode Island’s Future

By Representative Jon D. Brien and Jonathan Williams

As legendary Supreme Court Justice Louis Brandeis once wrote, we have 50 laboratories of democracy across the states. From these case studies, we can analyze which policies succeed, and which policies fail. Without a doubt, the largest threat to our 50 laboratories across the United States is rapidly mounting unfunded pension liabilities for government workers.

With an estimated unfunded liability ranging from $6.8 billion to more than $15 billion (depending on your actuarial assumptions), Rhode Island faces a huge threat to its financial sustainability. If you assume an unfunded pension liability of roughly $15 billion, which is the estimate that uses generally accepted accounting principles (GAAP) from the private sector, every man, woman and child in Rhode Island currently owes $14,256. This is a reality that is not negotiable.

Realizing that the current pension program is unsustainable, Governor Lincoln Chafee and State Treasurer Gina Raimondo have recently proposed the bipartisan Rhode Island Retirement Security Act of 2011(RIRSA).While some special interest groups may not consider the current pension situation in Rhode Island to be a true crisis, they should look no further than Central Falls, RI, which recently declared bankruptcy, and as a result, cut public pension plans by nearly 50 percent.

Other states have taken fundamentally different approaches to reforming their public pension programs. Michigan directly tackled its pension problem in 1997 by replacing the traditional “defined-benefit” pension plan with a 401(k)-style “defined-contribution” retirement plan for new state employees. The Michigan reforms have been immensely successful. According to a recent report from the Mackinac Center for Public Policy, Michigan’s 1997 pension reform has saved state taxpayers between $2.3 and $4.3 billion in unfunded liabilities. Of course, Michigan isn’t out of the woods yet, but at least their problem has been addressed and steps have been taken towards fundamental reform.

Michigan is not alone. Across the United States, elected officials are quickly realizing that full reliance on the defined benefit pension model for government workers is not sustainable. In 2010, Utah also took the approach of RIRSA, offering a hybrid plan and offering 401k-type flexible retirement accounts for new workers.

Unfortunately, the story in Illinois is not nearly as encouraging. In the last 10 years, Illinois legislators have continuously ignored the pension burden in their state—so much so that Illinois is presently in the worst shape in the nation, with an estimated unfunded liability of $85.6 billion. But that’s not all—according to the Illinois Policy Institute this number doesn’t include the $17.8 billion in pension obligation bond payments that are owed, which puts the total Illinois pension burden at $102.8 billion.

The beauty of the American experiment is that we have our 50 laboratories of democracy, where various policies have succeeded, while others have failed. Rhode Island residents should look not to the failed policies in Illinois, but rather to Michigan’s successful policy reforms, for proof that pension reform is possible and can produce positive results.

Not only will pension reform save Rhode Island taxpayers billions of dollars, but it will provide public workers with the security that their money will be there when they retire. Fundamental pension reform is a win-win for taxpayers and public employees alike. The choice is not between Republican versus Democrat, or Left versus Right. The choice facing Rhode Island is up versus down for economic growth and sustainability.

Representative Jon D. Brien (Democrat – District 50, Woonsocket), Chairs the House Municipal Government Committee and House Commission to Study Municipal Financial Integrity

Jonathan Williams is a member of the RI Center for Freedom’s special pension task force, is a co-author of ‘Rich States, Poor States’ and serves as Director of the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council, a non-partisan membership association of state legislators.

Dead State Walking

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So Reuters reports that Jefferson County Alabama has filed for backruptcy becase of an usupportable $5,000,000,000 debt.  With 660,000 people in the county that’s about $7500 in debt per person.

Rhode Island has somewhere in the vicintiy of $30,000,000,000 in debt when you include the (true) penson liability ($18B) , the infrastructure debt ($9B), the ‘OPEB’ liablities ($??B), and whatever else we’ve yet to identify.  That’s probably well north of $30,000 of debt per person.

If we have four times the per capita debt load and they’re bankrupt, what does that make us?

 

 

 

 

 

Small Pensions; Double (and Triple) Dipping

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The Significance of Small Pensions

In the public debate about suspending cost of living adjustments (COLAs) for retirees holding public-sector pensions, the most compelling argument addresses retirees whose income would drift below the poverty level as inflation erodes their pensions’ value.  It’s important to adjust one’s reaction, however, to account for the variation in individual circumstances.  One cannot assume, that is, that each pension is the sole source of income (even sole pension) for the retiree.

Take the pensioners in the Municipal Employees Retirement System (MERS), which the state administers and which has the lowest average gross pension (including COLAs) among the state’s various plans.  According to data available on RIOpenGov.org, the average for the 3,972 pensions in the municipal system is $13,285 per year.  Of those, 59 pensions are worth less than $1,000 per year — clearly not sufficient as a sole source of income; that’s 1.5% of MERS pensions, and it reduces the average by $192.

Expanding the range to include all pensions under $5,000 — still not enough to be more than supplemental income — brings the total to 799 pensions. Excluding them from the equation — on the grounds that we’re interested in the plight of retirees who live on their pensions alone and therefore cannot be made to suffer COLA suspensions — brings the average MERS pension up to $15,842, which is 45% greater than current poverty guidelines for an individual.

That still isn’t a great deal of money, but the relevant point is that many of these pensions are so small that it isn’t reasonable to present them as the retiree’s livelihood. Among all retirees, the average gross pension is approximately 71% of the final average salary that the person earned while working. That means that a pension of $5,000 would result from an employee’s pay of $7,000; such employees surely had other resources while working and may very well in retirement, too.

Unfortunately, payroll information for public employees has only been readily available to the public for a few years; it often isn’t descriptive of the working capacity of the employee; and very few retirees with low pensions retired recently. That last point, in itself, is very interesting: Among all 26,598 retirees, the average date of retirement is July 1998. For those with pensions under $10,000, it’s August 1994; under $5,000, January 1992; and under $1,000, October 1994. In general, and despite COLAs, those with the smallest pensions have been retired for longer. It would require extensive research to confirm, but the impression given is of the bad old days when pensions were easy rewards to give for minimal service.

Double/Triple Dipping

In some cases, the additional income for retirees derives from additional pensions. Of the 26,598 pensions on the state’s books, 1,195, or 4.5%, go to former employees who have more than one, and the average combined pension for these 574 individuals is $48,911. Five hundred and twenty nine have two pensions; forty-five have three.

(Identity was determined by full name, including middle initial or lack thereof, year of birth, and current city of residence.  Also note that these totals include individuals  who also receive “teacher survivor benefits” as a pension in lieu of similar provisions in Social Security, as well as retirees who receive pensions as “beneficiaries” but are not the original “owners” of them.)

In the interest of privacy, it’s preferable to discuss pensions in aggregate terms, but in this particular case, it’s impossible to convey a sense of things without pointing to at least a few specific examples. For that purpose, here are the twenty highest-paid retirees whose totals involve more than one pension:

Top 20 Retirees with Multiple Pensions, 2010
Age at Retirement Former Employer Year of Retirement Gross Pension 2010 ($)
Carmine DiPetrillo
$164,795
67
 Legislators (O)
1994
12,252
67
 State Police Judge – Family Court (O)
1994
152,543
Peter O’Connell
$134,907
69
 State Police Judge (O)
1990
92,776
72
 State (O)
1993
42,131
Deborah Jones
$130,926
50
 Cumberland School Dept. (B)
2002
40,083
50
 TSB
2002
22,500
56
 Cumberland School Dept. (O)
2008
68,343
Elizabeth Vendituoli
$130,598
54
 Bristol Warren Reg. School Dist. (B)
2005
42,401
54
 TSB
2005
22,500
55
 Bristol Warren Reg. School Dist. (O)
2006
65,697
Mary McCabe
$127,781
43
 State (B)
1984
44,940
63
 State (O)
2004
82,841
Audrey Carnevale
$125,330
47
 Legislators (B)
2000
9,501
47
 State (B)
2000
68,498
52
 State (O)
2005
47,331
Robert Gerus
$124,520
60
 Cumberland School Dept. (B)
2003
35,989
60
 TSB
2003
17,930
61
 State (O)
2004
70,601
Clifford Cawley
$121,082
59
 Legislators (O)
1987
19,896
59
 State Police Judge – Superior Court (O)
1987
101,186
Vincent Cullen
$120,542
55
 Cranston School Dept. (B)
1989
4,667
55
 TSB
1989
16,137
68
 State (O)
2002
99,738
Samuel Greenstein
$120,246
57
 Providence School Dept. (B)
2002
42,527
57
 Providence School Dept. (O)
2002
77,719
Marcia Clifford
$118,956
38
 State Police Judge (B)
1987
56,229
52
 State (O)
2001
62,727
Susan Browning
$116,254
53
 Providence School Dept. (O)
2001
57,996
54
 Coventry Public Schools (B)
2002
42,388
54
 TSB
2002
15,870
Livia Giroux
$112,609
48
 Smithfield School Dept. (B)
1990
33,534
48
 TSB
1990
13,500
62
 West Warwick School Dept. (O)
2004
65,575
Francine Gonnella
$109,369
63
 Judges – Superior Court (B)
2007
34,666
63
 Providence School Dept. (O)
2007
74,703
Rita Munzer
$107,113
63
 Warwick School Dept. (O)
1983
29,936
66
 State (B)
1986
55,896
85
 State (B)
2005
21,281
Geraldine Guglielmino
$106,838
63
 State (B)
1998
39,156
64
 State (O)
1999
67,682
Sydney Williams
$106,371
58
 Newport School Dept. (O)
1986
64,752
63
 Newport School Dept. (B)
1991
23,689
76
 TSB
2004
17,930
Gladys Thomas
$105,769
53
 State (B)
1989
34,887
61
 State (O)
1997
70,882
Nancy Cunningham
$104,988
58
 State (B)
1989
69,074
59
 North Kingstown School Dept. (O)
1990
35,914
Marcella Delnero
$102,464
59
 State Police Judge – District Court (B)
1988
49,997
61
 Newport School Dept. (O)
1990
52,467
Notes:
“O” = owner
“B” = beneficiary
“TSB” = Teacher Survivor Benefit
Identity was determined by full name, including middle initial or lack thereof, year of birth, and current city of residence.

 

The Individual Stories

Sifting through the pension list in order to understand the decisions behind the numbers is fascinating, but time consuming — not the least, as noted above, because the available data is sparse, recent, and incomplete.

For example, trying to figure out the lives and deals behind the very low pensions, one might come across John Marchant, who receives $609 per year based on work with the Town of Scituate. He appears to have “retired” in September 2007, so he shows up on a payroll filing from that town available on The Money Trail, showing his pay as $2,000, without description of his job. Another angle comes into view with Joseph F. Cassidy, who receives $333 annually for a non-teaching role in the Pawtucket School Dept., which he left in 1979. An Internet search for Mr. Cassidy turns up an RI House resolution from June 2010 congratulating his son upon his retirement as Director of Planning and Redevelopment for the City of Pawtucket.  (The pension rolls are full of repeated last names.)

The double- and triple-dip pensions are even more intriguing but require some delicacy, because the better part of them appear to involve a deceased spouse. Deborah Jones, for instance, has been receiving a pension as a “beneficiary” and a TSB since 2002, totaling $62,583. She then retired from the same district, adding another pension in 2008. The payroll for her final year has her receiving $73,334 as a substitute teacher.

None of this should be taken as evidence of wrongdoing on the individuals’ part. Behind the pension statistics are people trying to make the best decisions that they can as they deal with the unpredictable events and opportunities of life.  But as Rhode Island’s retirement system devolves into further crisis and state officials come forward with proposals to resolve (or at least postpone) it, honest assessment and tough judgment are the order of the day.

After all, behind the “employer contributions” are taxpayers struggling to get by in an atrophied economy while public decision makers treat retirements that are both long and lavish by private-sector standards as inviolable commitments.

Retirees, the Young and the Wealthy

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The two categories listed in the title of this post are meant to be separate.  From some folks’ point of view, Rhode Island’s retirees are both young and wealthy, as a group, but with this post, my intention is to take a look at age at retirement and the dollar amount of gross pensions as separate topics.

Regarding the first, the average retirement age of the 26,598 included in the database that the Employees’ Retirement System of Rhode Island (ERSRI) provided to RIOpenGov.org was 58 — with an average gross pension of $33,388 and years retired of 13.  Of course, different careers tend to come to retirement at different ages, and Rhode Island’s many public employers vary in their generosity.

As is to be expected, police, fire, and rescue departments lead the list of youngest retirees, with the following top 20:

 

Top 20 Rhode Island Police, Fire, & Rescue
Departments by Age at Retirement
Number of Retirees Average Age at Retirement Average Gross Pension ($) Average Years Retired
Harris Fire & Light Dist. 1 30 24,345 12
Hopkins Hill Fire Dept. 1 42 20,829 2
Richmond Police Dept. 1 42 26,392 9
Woonsocket Fire Dept. 12 42 25,378 5
Cranston Police 8 43 41,956 6
Woonsocket Police Dept. 52 44 32,490 5
Cumberland Rescue 4 44 20,003 7
Smithfield Police Dept. 3 44 24,232 13
New Shoreham Police Dept. 2 45 36,762 6
Cranston Fire 5 46 39,192 3
Lincoln Rescue 6 46 20,556 6
Washington Fire District 1 46 30,622 11
State Police 4 46 63,501 6
Coventry Fire Dist. 7 46 33,822 6
Johnston Firefighters 2 47 35,981 4
Charlestown Police Dept. 11 47 32,858 9
North Smithfield Fire & Rescue Services 5 47 31,819 7
Tiogue Fire Dist. 2 48 19,216 18
Burrillville Police Dept. 9 48 28,660 14
North Kingstown Police Dept. 30 48 33,592 8

 

Teachers begin retiring a few years later:

Top 20 Rhode Island Teacher Groups by
Age at Retirement
Number of Retirees
Average Age at Retirement
Average Gross Pension ($)
Average Years Retired
BEACON Charter School of Woonsocket
1
52
38,954
12
Charlestown Teachers
2
55
15,954
30
Johnston School Dept.
215
55
43,505
13
Tiverton School Dept.
161
55
41,322
13
West Warwick School Dept.
275
56
45,431
11
Smithfield School Dept.
173
56
41,023
13
Chariho Regional School Dist.
248
56
40,728
11
East Providence Schools
479
56
45,030
12
Northern Rhode Island Collaborative
10
56
38,481
7
Coventry Public Schools
325
56
47,098
13
Central Falls Collaborative
166
57
44,896
10
Narragansett School Dept.
123
57
40,643
10
Lincoln School Dept.
193
57
45,148
13
Bristol Warren Reg. School Dist.
296
57
41,421
13
Pawtucket School Dept.
632
57
43,330
12
Woonsocket School Dept.
469
57
42,289
12
Portsmouth School Dept.
211
57
43,065
12
North Providence School Dept.
251
57
46,787
11
Newport School Dept.
363
57
41,593
14
Cranston School Dept.
769
57
44,425
13

 

Switching to rankings of retirees by the amount of their pensions, Superior Court leads the list:

Top 20 Rhode Island Public Employers by
Average Gross Pension
Number of Retirees
Average Age at Retirement
Average Gross Pension ($)
Average Years Retired
Judges-Superior Court
10
70
104,264
5
Providence 12 month bi-weekly (teachers)
22
57
71,620
7
Coventry Lighting Dist.
1
80
68,834
5
State Police Judge
317
49
68,171
20
State Police
4
46
63,501
6
Narragansett School Dept./Adm.
5
59
62,731
6
Barrington Fire Dept. (25 Plan)
1
57
50,657
8
East Greenwich Hsg. Auth.
1
66
49,646
3
Coventry Public Schools
325
56
47,098
13
North Providence School Dept.
251
57
46,787
11
West Warwick School Dept.
275
56
45,431
11
Lincoln School Dept.
193
57
45,148
13
East Providence Schools
479
56
45,030
12
Central Falls Collaborative
166
57
44,896
10
Warwick School Dept.
980
57
44,598
14
Cranston School Dept.
769
57
44,425
13
Cumberland School Dept.
334
57
43,614
12
R.I. Airport Corporation
22
57
43,537
6
Johnston School Dept.
215
55
43,505
13
Pawtucket School Dept.
632
57
43,330
12

 

As far as individual retirees are concerned, however, the top list is much more dramatically dominated by judges:

Rhode Island’s 20 Highest Pensions
Former Employer
Age at Retirement
Gross Pension ($)
Years Retired
WEISBERGER, JOSEPH R State Police Judge (Supreme Court)
81
195,000
10
RODGERS, JOSEPH F State Police Judge (Supreme Court)
68
185,648
2
SHEA, DONALD F State Police Judge (Supreme Court)
70
174,144
16
ARRIGAN, ROBERT F State Police Judge (Worker’s Comp.)
70
171,567
8
MACKTAZ, PAMELA M State Police Judge (Family Court)
65
169,594
4
HIGGINS, Michael A State Police Judge (District Court)
66
168,770
1
DIPETRILLO, CARMINE R State Police Judge (Family Court) & Legislator
67
164,795
17
RAGOSTA, VINCENT A State Police Judge (Superior Court)
84
164,654
3
ROTONDI, JOHN J State Police Judge (Worker’s Comp.)
65
163,229
4
CRESTO, DOMINIC F State Police Judge (Superior Court)
67
162,800
12
GAGNON, RONALD R State Police Judge (Superior Court)
72
162,269
9
MOORE, PATRICIA D State Police Judge (District Court)
68
159,828
4
ISRAEL, RICHARD J State Police Judge (Superior Court)
71
159,762
10
LIPSEY, HOWARD I Superior Court
72
157,794
3
CAPPELLI, JOHN State Police Judge (District Court)
65
155,782
10
GRANDE, CORINNE P State Police Judge (Superior Court)
65
155,766
18
RAO, CARMINE A State Police Judge (Worker’s Comp.)
71
152,251
10
GORMAN, WALTER Superior Court
71
151,871
3
NAZARIAN, JOHN State
76
144,260
3
BERETTA, VICTOR State Police Judge (District Court)
65
143,003
18

Occupy Phil Donohue

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If you are under the illusion that the ‘Occupy’ folks are onto something new… check out this terrific video blast from the past from the Phil Donohue show …

Milton Friedman on the socialist utopia: “Where in the world are you going to find these angels who are going to organize society for us?”

 … Burnside park with the philosophy advocated below? 

Pensioners Over Pay

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On Sunday, I looked at aggregate data for Rhode Island public-sector retirees who are making more in retirement than they did while working. Aggregate data doesn’t really capture (or humanize) the matter, which justifies presentation of the numbers from the perspective of individual pensioners (while striving to be respectful of the individuals involved).

The following graph shows the gross pensions (base pension plus cost of living adjustment [COLA]) and the amount that it exceeds final average salary for the 3,298 retirees in this group as of 2010.

 

As the previous post in this series pointed out, the average pension for this group is $45,815, which averages $6,338 above final average salary. Some other noteworthy averages are as follows:

 

All Retirees Retirees over Salary Top 50 Retirees over Salary
Age at retirement
58
56
59
Years retired
13
18
21
Final average salary
$44,006
$39,477
$41,285
Base pension
$23,635
$27,434
$39,088
COLA payment
$6,615
$15,691
$30,720
Gross pension
$31,388
$45,815
$72,253

 

Although, as I showed in the previous post, the trend lines aren’t as one would expect (with those retired for fewer than 20 years more likely to have pensions greater than their salaries than those retired for more than 30 years), it isn’t surprising that, in general, those whose pensions compare favorably with final pay have been retired for longer.  It is also not surprising that COLAs play a role in pushing pensions above pay.

It is very much worth noting, however, that COLAs don’t provide the whole story.  The generosity of the pension deals is also critical.  Among all retirees, the average base pension is 54% of the average final salary.  Among retirees who’ve exceeded their salaries, it’s 69%, and among the top 50 such retirees, it’s 95%.  Once again, it isn’t unreasonable to suggest that including  “earned benefits” in reform efforts shouldn’t be of the table.

 

ADDENDUM:

By way of a disclaimer, I should note that, at the level of the individual retiree, some results are so conspicuous that they may indicate errors in the state’s data.  In the graph above, for example, sixteen or so retirees can be seen to have pensions that are almost entirely made up of money that is above and beyond their final salaries.  If that is not database error, the state should surely investigate.  However, for our purposes, such results number so few that they can’t skew the overall findings but so much.

While I’m making notes:  another interesting objection that I’ve heard is that some of the retirees in the database are shown to have retired at very young ages — as young as two years old.  This actually does not appear to be an error, generally speaking, but rather, the result of survivor benefits or something similar.  The two-year-old retiree, for example, can confirmed to be a young lady living in Woonsocket (or at least to have the same name).  Another child is listed as retiring the same year as her school-teacher mother passed away (as can be confirmed online).  Whatever the case, of the 26,598 retirees for whom we have data, only eight retired before age 20 and only 53 retired before age 30.

The Pension Illusion

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The Illusion of Public Sector economics

There is something important to keep in mind as we start down the path of debating pension reform in Rhode Island. It is perhaps not the most vital point in a debate where what really matters is “Truth in Numbers”, as Treasurer Raimondo puts it, but as a premise by which we frame the debate it is certainly worth noting.

The premise is that employees contribute to their pension plans. It is, in a very important way, false.

The premise is not unlike the related illusion that businesses pay taxes. They don’t. Not just in the Warren Buffet pays less than his secretary way. (Which is of course, baloney – he probably pays more sales tax on a dinner tab than the average secretary pays in income taxes in a year.) But rather, in the sense that corporations just pass through their costs to their customers.

It’s a failure to understand macro-economic concepts relating to the allocation of capital in a capitalist system that leads to this illusion. That may sound a bit high-brow, but really it just requires a bit of thought about human nature.

Imagine that you are going to invest in a business – perhaps you have $1000 in a 401k and you have to decide what stock to buy. You need to decide how much risk you’re willing to take and then look around to see what business will give you the best interest rate on your $1000 investment. Maybe you call an investment advisor to help sort it out.

That advisors job is to sift through the tens of thousands of companies out in the world and decide how risky they are and what return they generate. Since they can’t look at every company every time they need to get some advice, the market has created some short-cuts. Stock exchanges are probably the first layer of filtering. New York Stock Exchange listed companies have to be big and stable. The “Dow Jones Industrials” are an even more exclusive list of the power players.

There are other short-cuts as well. Things like “price-earnings” or “P/E” ratios give us an estimate on how much interest an investment n a company will pay. And different industries have different standards for where those P/E rations should be. Strong companies can pay out less interest because they are less risky. Speculative investments require higher interest rates to justify the risk.

So what does this have to do with corporations and taxes? Simply put, if you raise a tax on a corporation it doesn’t lower their earnings. They need to maintain the value of their stock, and that requires maintaining earnings. So what they do, along with all the other companies in their industry, is raise prices. So who pays taxes on Amazon, or Wal-Mart, or Big Oil? You do.

And what does this all have to do with pension contributions? It’s a different problem, but the same illusion. When a company “contributes” to an employee pension – say 50% comes from the employee’s paycheck and 50% from the “company” – it’s really just coming out of the employee’s pocket. If it weren’t for a variety of complicated and costly governmental carrots and sticks found in the tax code, the company would probable just as happy to give that cash directly to the employee. On their books “salary” and “benefits” are just two sides of the same coin. It’s what it takes to convince someone to spend eight hours a day on the shop floor or at a desk pushing paper.

In the end, the cost is the cost, and whether they pay it in the form of salary or benefits doesn’t really do much to impact their competitiveness. It may be convenient to have your employer pay for your dental insurance, or your retirement fund, or a disability plan, but if they told you they were just going to give you all that money directly – say a 30% raise – and you could buy it yourself, would that be a reason to turn down the job? Probably not.

With public sector workers the same illusion applies. They don’t “contribute” to their pension, even if their pay stub shows two percent or 10 percent or whatever the split might be. That’s just a slice of the cost of employing that person.

The problem we have with public employee pensions is not how we allocate the split – whether it shows up as 90/10 or 10/90 on a government workers pay-stub, 100% of the cost is coming straight out of your pocket in the form of taxes.

So – that was all by way of a preface.  Why I care about these type of illusions is because getting this basic economic perspective helps us understand the roots of the pension crisis.  The crisis stems from lack of (1) market controls and (2) limitations on worker rights that prevent us from knowing how much that employee is costing us and where the purported “contributions” are going.

The market controls are those described above – in the private sector businesses need to maintain profitability or no one will invest in them. They can’t risk making promises without properly funding them because of market transparency. If investors discovered a multi-billon dollar unfunded liability in a company with only a few billion in revenues coming in each year, that stock would plummet. Since that scares the heck ot of investors they require all sorts of private controls lke independant actuaries and outside auditors.

With a government, there is no such control. Ratings agencies provide same level of oversight, and the voters technically have a say in firing the leaders who caused the mess, but in reality there are not adequate incentives for the people to provide their own oversight. In Rhode Island, as elsewhere, actuaries are ignored or written off as doomsayers.  Worst of all, government finances are an impenetrable black box to most citizens.

The pension fund itself is another black box, and in effect it’s as if workers are not allowed to see what has been put aside for their retirement. There are promises of future payments of course, but since the money needed to keep those promises is not there when a pension system is not properly funded the retirees can only hope that the checks will show up each week.

Essentially the state has taken the pension money and frittered it away by not funding the pension system. If a private investment firm did what the state did somebody would be led away in handcuffs. In the private sector a retiree has the right to sue a trustee that was supposed to be managing their money in good faith. It’s an interesting legal question as to whether a state pensioner could sue state officials for breach of their fiduciary duty. The retirement board’s own actuaries have stated publically that the projected returns are more likely than not unachievable – they tell us that we have a 42.5% chance of seeing a 7.5% average rate of return, but they’re still basing our reform plans on that bad assumption. A 42.5% chance of getting the promised pension check? Is that a risk retirees should be happy with? My suspicion is that they expect odds somewhere above 90%, and if so they are not wrong to hold such expectations (And wold they be wrong to demand such certainty?)

Shouldn’t the retirement board be held responsible for placing workers pension checks at risk? If not, then what’s the point of calling them trustees?

In the end, we are the victims of these illusions. The pensioners of the state of Rhode Island and it cities and towns have been mis-led to by politicians and union bosses who knew what was going on. They had a view inside the black box, and told the workers who were relying on their professional oversight that everything was fine – that their contributions were earning interest and were adequate to fund a stable retirement.

Really it was a lie on top of a lie. The contributions were not made and the black box was just another insider’s piggy-bank.

***