Task Force: Pension liabilities are “under-cooked”!

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Task Force: Pension liabilities are “under-cooked”!

While some opponents to pension reform in the Ocean State have suggested that Treasurer Raimondo has “cooked the books” by over-stating the pension liability  … a new report by Eileen Norcross of the Mercatus Center, a member of the special pension task force assembled by our RI Center for Freedom, suggests that it is more likely that the books are “under-cooked” … and that the true pension liability may be twice as large as stated, or about $18 BILLION!

Read the full Mercatus Center Report here …

Rhode Island’s state and municipal pension systems face large and growing unfunded pension liabilities. The governor and state treasurer have identified pension reform as a key to stabilizing the state’s finances and also to ensuring a sustainable retirement fund for Rhode Island’s public employees. According to government estimates, the unfunded liability for municipal plans and state plans totals $9.3 billion. These figures are calculated under assumed discount rates based on the expected return on pension asset investments. However, according to economic theory, pension liabilities should be valued based on their relative risk and thus the return on Treasury Bonds is currently the appropriate discount rate to use when valuing liabilities. Under this valuation, the unfunded liability for municipal governments including MERS and locally administered plans (and excluding the local portion of the teachers’ plan) swells from $2.4 billion to $6 billion. The unfunded liability for the state plans increases from $6.8 billion to $12 billion.

The result of this miscalculation is that many municipal governments are in far worse shape that is currently reported, which presents serious revenue challenges for a number of Rhode Island municipalities. Unfunded municipal pension liabilities currently exceed municipal revenues by $2.6 billion in Rhode Island. The revenue index created in this paper indicates that Johnston, Providence, Cranston, Newport, and Central Falls are all in particularly bad shape relative to other municipalities in the state.

Among the eye-opening facts and figures in the report:

* Rhode Island estimates the unfunded liability for municipal and state plans is $9.3 billion, while Mercatus researchers calculate it as closer to $18 billion.

* Using the authors’ revenue index, 17 of the 39 Rhode Island municipal governments are in the danger zone-their unfunded pension liabilities exceed revenues.

* How did they reach this number? The authors argue that the huge difference in estimates is based on inaccurate accounting. In fact, financial markets and economists would calculate pension liabilities based on their relative risk, but currently Rhode Island calculates their liabilities based on the expected return on investment of the pension assets.

Click here to read the full report from the Mercatus Center website …

Clicke here to read our Center’s Media Release

MEDIA COVERAGE:

ProJo blog …

GoLocalProv blog …

WJAR TV-10 blog …

Bloomberg/BusinesWeek: http://www.businessweek.com/ap/financialnews/D9QSOVSG0.htm

Boston Globe – Online: http://articles.boston.com/2011-11-08/business/30374064_1_pension-liability-pension-problem-pension-increases

The Daily Journal: http://www.dailyjournal.net/view/story/f13c3e264ac14fb8940dae3ab1f69d50/RI–Pension-Underestimated-Costs/

Individual.com: http://www.individual.com/storyrss.php?story=146552126&hash=f715e25035269eeddf2683e5a2ee7c80

MSNBC.com: http://www.msnbc.msn.com/id/45213474/ns/local_news-providence_ri/#.TrrJxXJxB7w

WLNE-TV (ABC): http://www.abc6.com/story/15988707/researcher-says-ri-understating-pension-problem

Yahoo! Finance: http://finance.yahoo.com/news/Researcher-says-RI-apf-166933908.html?.pf=retirement&mod=pf-retirement&x=0&.v=1

Bastiat Institute: http://www.bastiatinstitute.org/2011/11/08/rhode-island-pension-problem-larger-than-reported/

Opposing Views:

Providence Phoenix blog …

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