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Russell Moore: The Tyranny of the One Percent

Monday, April 14, 2014


Rhode Island talking heads and other assorted Arbiters of Truth and Justice (talk show hosts and callers, print media columnists, coffee shop bloviators) have gotten themselves all worked up over the process to settle the state pension lawsuit.

Yet in typical Rhode Island style, the aspect of the process that was and is the most offensive, is predictably and unfortunately, being talked about the least. Ah, just another week in Rhode Island news and analysis!

The real shame surrounding the pension lawsuit if the fact that, as golocalprov reported on April 7, that just 1 percent of the whole voting block was able to band together and shoot down what was a very reasonable pension reform settlement deal. Just 254 members of the relatively small Police union voted to reject the deal. The settlement was proposed in such a way that if more than 50 percent of any of the six unions rejected the deal, it failed.

All of the other unions affirmed the deal by wide margins.

Misplaced criticism

Yet the vast majority of the criticism has come against the unions for the way they counted the ballots (any non-vote was counted as a yes), against General Treasurer Gina Raimondo saying she sold out taxpayers (when in fact, she did no such thing—not even close), and against union leaders by union members saying that the deal wasn't sweet enough.

All of those criticisms, in my opinion, are invalid. The union leadership negotiated the settlement on behalf of its members, and therefore had a right to set up the voting process as they themselves saw fit.

Raimondo, for her part, was ordered by Superior Court Judge Sarah Taft-Carter to negotiate a settlement that she believed was affordable for taxpayers. To do anything else would have been akin to her holding the court in contempt. And, as I argued a few weeks ago, the deal she agreed to was a wise, logical compromise that would've preserved 95 percent of the savings from pension reform, and negated the chance for the whole $4 billion in savings to be lost in the shuffle.

That hardly looks like a sell out. It looks a lot more like a wise and prudent investment in an insurance policy on behalf of the state of Rhode Island. And how anyone can believe that all of a sudden Raimondo would become a darling of the unions because she negotiated back 5 percent of pension reform is downright laughable in its naiveté.

(It was disingenuous when Providence Mayor Angel Taveras said he prefers negotiating pension cuts instead of legislating them. Let's not forget that it was the Providence City Council that first legislated pension cuts, which gave Taveras the leverage he needed to enact "pension reform", which, by the way, only delays the problem in Providence for a few years--just long enough for him to try and get himself elected Governor. Taveras praised the council when they legislated those cutbacks in pensions.)

Face the facts

And insofar as union members thought their leaders didn't get enough savings back for them in the negotiations, I'd have to disagree. Nobody likes the fact that Rhode Island simply doesn't have enough money, or ability to generate enough money, to pay the—let's face it—pretty generous pension benefits that past leaders have promised.

It's a truth that so many pensioners past and future don't want to face, but when it's all said and done, this really is a math problem. Nobody wanted to scale back pensions for workers and retirees, but in the end, you simply can't get blood out of a stone.

But don't take my word for it. Phil Keefe, the Vice President of The SEIU State Council, who is also the President of the SEIU Local 580, in comments to Common Ground, which is a monthly Rhode Island publication written expressly for union members, put it just about as bluntly as can be imagined in article in the publication's most recent edition.

"Rejecting the settlement gains nothing for union members," said Keefe. "That's the bottom line."

Keefe went on to point out the obvious truth in this whole situation. Even if the courts decided that there was, in fact, an implied contract between the state and its workers and retirees, and that the state couldn't get out of it, there would still be a $4 billion dollar question hanging over the state's figurative head.

How would Rhode Island make up for that loss in revenue? Well, it could try massive tax increases. But capital goes where it's best treated, and Rhode Island can't simply tax itself into prosperity or even out of problems. Why? Because people will simply leave this state and move to other places where they can stretch their dollars further--free of the Rhode Island's taxation.

That would leave Rhode Island with only one other option—cutting spending. If we started to cut back on social programs to the tune of billions of dollars, we'd have people starving in the streets and crime would skyrocket. That doesn't seem like a solution.

A true injustice

This brings us back to the union members. The state would have to drastically scale back its workforce even further, so much that the people who brought this lawsuit against the state would be the ones impacted the harshest—not to mention the state's residents who would see huge reductions in services.

All of this is to say that if the pension lawsuit does go the way the police officers union wants, it would be a complete Pyrrhic victory—with those who "won" losing the most.

In the end, that just 1 percent of the total voting block was able to send a rational agreement into oblivion is a real injustice—and that's not being talked about enough.


A native Rhode Islander, Russell J. Moore is a graduate of Providence College and St. Raphael Academy. He worked as a news reporter for 7 years (2004-2010), 5 of which with The Warwick Beacon, focusing on government. He continues to keep a close eye on the inner workings of Rhode Islands state and local governments.


Related Slideshow: Providence Pension Liability

A new report shows that Providence’s pension fund—even after the recent reform—is still in trouble. The below slides break out the key numbers for the pension fund, including the unfunded liability, the assumed and actual rates of return, the current level of benefits, and how long it will take the city to pay off the unfunded liability. Figures are current as of July 1, 2013 and are taken from the new Jan. 31 actuarial report from Segal Consulting.

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Unfunded Liability in 2013

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Unfunded Liability in 2011

Total Liability: $1.2 billion

Actuarial Assets: $380.4 million

Unfunded Liability: $831.5 million

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Percent Funded in 2013

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2013: 31.39%

Percent unfunded in 2013: 68.61%

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Percent Funded in 2011

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2011: 31.94%

Percent unfunded in 2011: 68.06%

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Rate of Return

Former Assumed Rate of Return: 8.5%

New Assumed Rate of Return: 8.25%

What the state’s assumed rate of return is: 7.5%

What Moody’s Investors Service says the assumed rate of return should be: 5.5%

What investor Warren Buffet says the assumed rate of return should be: 6%

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Actual Return on Investment

Actual Market Return in FY 2012: 1.49%

Actual Market Return in FY 2013: 11.35%

Current Assumed Rate of Return: 6.42%

Average Market Rate of Return for FY 12 and FY 13: 8.25%

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Impact of Lower Rates of Return

$72 million:The city unfunded liability increased by this amount when the city lowered its assumed rate of return by a quarter of a percentage point, from 8.5% to 8.25%

$506.2 million: The estimated increase in the unfunded liability were the city to use the 6% assumed rate of return recommended by Moody’s Investors Service.

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Retiree Pay – Fire and Police

Number on Active Duty: 834

Average Annual Pay: $61,325

Number of Retirees: 587

Average Retiree Age: 65.3

Average Retiree Annual Pay: $40,512

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Disability Pensions – Fire and Police

Number on Disability: 418

Average Age: 64.8

Average Annual Pay: $59,028

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Retiree Pay – Other City Workers

Number of City Workers: 2,164

Average Annual Pay: $38,687

Number of Retirees: 1,453

Average Retiree Age: 72

Average Retiree Annual Pay: $18,252

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Disability Pensions – Other City Workers

Number on Disability: 88

Average Age: 66.8

Average Annual Pay: $18,684

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Current Cost of Pension Fund

For 2013

City Contribution: $58.1 million

Employees Contribution: $10.9 million

Net Investment Return: $18.1 million

Cost of Retiree Benefits: $95.4 million

Note: Net investment return is the return on investments after investment and administrative fees have been paid.

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Cost of Pension Fund in 10 Years

Normal Cost: $9.8 million

Additional Cost Because

of Unfunded Liability: $84 million

Total Annual Cost: $94.3 million

Note: Total figure for the year includes a small second payment for the deferred liability.

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Cost of Pension Fund in 20 Years

Normal Cost: $13.9 million

Additional Cost Because

of Unfunded Liability: $118.5 million

Total Cost: $132.4 million

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Paying Off Unfunded Liability

Average annual increase: 3.5%

Number of additional years to pay off: 27

Fiscal year unfunded liability to be paid off by: 2040


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