December 8, 2008

A Bracing Dose of Reality

Engaged Citizen

Proem: Al Lubrano, President of the RI Manufacturers Association, appeared on the Dan Yorke Show December 2 to share his thoughts on turning the Rhode Island economy around. Jeff Deckman e-mailed the following to Dan, reprinted here with Jeff's permission. M.C.


You are dead on with your comments to Al about his seeing it as a collaboration and the unions seeing it as a competition.

I worked with Al when I was on the Economic Policy Council for a few years. He is a very sharp and hardworking guy but like the Governor, he doesn't get that he is in a street fight with an opponent who is after a different outcome.

Al wants a great place to raise a family and run a company and he cares about his fellow Rhode Islanders. As long as he has that, then he has a chance at being able to afford to live.

The unions want their power and their pensions and they see their fellow Rhode Islanders as people who are obligated to pay the bills. As long as they have that, they are protected from any fall out.

Al cares about the state because he is a good guy who is honorable. But unless he shows up with a baseball bat VERY early on in the conversation there will be NO cooperation or collaboration.

It amazes me how everyone wants to be nice and negotiate with union leaders. You have to be a moron to not know how these guys negotiate. I had a company that went union last year and their tactics would make your hair curl.

Besides, negotiating with [Secretary-Treasurer of the Rhode Island AFL-CIO George] Nee or the rest of them is like negotiating with Tony Soprano.

As long as you are giving him what he wants, he is at the table. The minute you aren't, he breaks out HIS baseball bat and takes what he wants because he already has the power.

You totally get it that one can only negotiate from a position of political power. Al may know business power but he doesn't understand anything about how political power thinks.

So I wish him well. But he better button his chin strap because he will be looking out the ear hole by the time they are done with him.

[Jeff Deckman is the founder of Capability Accelerators and served as the Executive Director of the Rhode Island Republican Party in 2005.]

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The Ocean State is "On the Waterfront."

We coulda been an economic contenda ...

What the unions have done for GM, Ford, Chrysler, Braniff, PanAm, various steel companies and the like they are doing for the State of Rhode Island.

That's why this state has to offer "rebates" to get companies to locate here (a/k/a buy our inferior, union made product).

Posted by: Tom W at December 8, 2008 2:38 PM

Al is yet another example of people in the private sector not understanding the public sector. And the opposite is also just as true.

Al is a turnaround guy. As such, he knows that there are time when Chapter 11 is a better alternative than continuing negotiations with parties who can't or won't change. He should recognize, as have many other turnaround pros (like Don) that RI is such a case.

You can't negotiate with the public sector unions or the Poverty Institute crowd. Nor can you use the political process to achieve even a veto override-proof minority in the General Assembly. Those whose primary concern in life is further redistributing the fruits of what is left of RI's productive private sector are simply too entrenched. Only a tremendously painful economic collapse will bring about the change RI needs. Hence, the best strategy for those like Al who seek this end should be to take steps to hasten the arrival of this collapse -- and not waste his time "negotiating" with the likes of Frank Montanaro.

Harsh, but inescapably true.

Posted by: John at December 8, 2008 3:47 PM

I think Al has a good point, but he's missing the larger point: the Governor is a fraud.

He criticizes Paiva-Weed for hiring Tom Coderre at a salary of $130,000 per year, when he hired Steve Cass at the same salary. The guy is like delusional.

The Governor is also another one of those "go along to get along guys", who care more about being liked than doing the right thing.

Why is their no outrage that the Governor's "Blue Ribbon" panel for transportation only reccomended increasing taxes and fees to pay for road repairs. Don Carcieri is just more of the same. I think of him as "Lincoln Almond Light".

Posted by: Rasputin at December 8, 2008 4:33 PM

I'm with Rasputin.

Posted by: Greg at December 8, 2008 5:58 PM

Tom W.

Come on. Didn't you hear UAW President Gettlefinger tell Congress that the Union has made "concessions" and that as a result of their last contract the wage gap between the Little 3 and the Non-US Automakers "will be largely, if not completely, eliminated"?

The key words being "will be" as opposed to "are".

Typical Union crap ...kicking the can down the road in the hopes of having more time sucking on the tit.

Kind of like Bob Walsh convincing Andrew that the RI Pension system is on the path to being fixed just need to wait 'til 2026.

Anyone other than Andrew would say "Gee Bob, if it is going to take that long, that seems to be a clear indication that there must be a real structural problem with the plan and the likely-hood of it ever being fixed is nil. And by the way Bob, when you say it is going to be fixed by 2026, is that at all like when the General Assembly told us back in July that we had a Balanced Budget for this fiscal year?"

Like the State of RI, the only, best and permanent solution to their finacial woes is to go into full blown Bankruptcy so that they can give the Patrick Crowley (i.e. the Finger) to the Union contracts.

Posted by: George Elbow at December 8, 2008 9:42 PM

>>Like the State of RI, the only, best and permanent solution to their finacial woes is to go into full blown Bankruptcy ...

Well, it looks like the UAW is getting its bailout, at least for now (what the mainstream media isn't saying is that the only significant difference between the proposed "restructuring" of the "Big Three" with a bailout and a CH. 11 restructuring is that with the taxpayer funded bailout the UAW contracts are effectively exempt from a restructuring).

As for Rhode Island, it is already technically bankrupt. As this country enters the worst recession in decades, the General Assembly has managed Rhode Island to ENTER this downturn with billions in unfunded pension liabilities, un-maintained and thus collapsing infrastructure, below-average public schools and the nation's highest unemployment rate.

And the best that the clueless morons can come up with is to encourage people to sign up for food stamps, hope the Obama pushes a big construction stimulus package, and hire six-figure part time chiefs of staff.

Rhode Island is not only fiscally technically bankrupt, but intellectually bankrupt as well!

Posted by: Tom W at December 8, 2008 9:55 PM

Oooo. The guy who understands less about retirement funds than anyone else in Rhode Island (no small achievement, in this state) doesn't like me. I'm so hurt.

Posted by: Andrew at December 9, 2008 12:21 AM


I like you plenty, particularly 'cuz you are as bright as you are.

Unfortunately, you've become Walshian in your ability to avoid answering the simplest of questions.

When asked to run a model that simply demonstrates how much an employee Contributes versus what that employee Receives as GUARANTEED Benefits (knowing the difference needs to be made up by either unpredictable investment returns or more likely the Taxpayer), you launch into silly nonsense about what weighs more, a pound of Feathers or a pound of Lead.

By the way, if you are in a 401k plan and your fund loses a Pound of Feathers and I'm in the RI Defined Pension Plan and my fund loses a Pound of Lead, your loss is far greater (heavier) as I could care less about gains & losses (i.e. Risk) 'cuz I get my Guaranteed benefit regardless ...compliments of the hardworking Taxpayers like yourself.

But no matter, you keep right on telling Bob Walsh that his demands and projections are reasonable, sustainable and fair if it helps you feel "objective".

Step 1 in getting people to understand the retirment system in RI is to demonstrate to them (particularly those on the dole) the massive Guaranteed payout they receive compared to the minimal amount that they Contribute.

But it seems you are not the least bit interested in educating people about the biggest issue facing our financial viability as a State. Apparently, you'd rather talk in circles about Feathers & Lead.

Posted by: George Elbow at December 9, 2008 7:35 AM

I'm not avoiding any questions. I'm telling you they're irrelevant.

Not counting the investment growth for a defined-benefit plan makes as much sense as not counting the investment growth for a 401(k) plan – which is to say no sense at all. The only thing that matters, from a fiscal perspective, is whether there is enough money to fund the payouts, after the inputs and the investment growth have been taken into consideration. Anything else is a distraction. And iff your problem is that investment returns are unpredictable, then you're still on the path that says 401(k)s aren't a reliable retirement vehicle.

BTW, the flip side to a DB participant not having to worry about a big loss (actually a less-then-average gain) in any single year is that he also doesn't get any "extra credit" for a boom, like a 401(k) participant does. If the actuaries have done their jobs, and the pols are honest, then the extra kick from the boom years is supposed to help cover the shortfalls from the bust years.

Posted by: Andrew at December 9, 2008 10:42 PM


You continue to miss the point.

I simply want to demonstrate the Massive GUARANTEED payout one Receives from the RI DB Pension Plan in relation to the minimal amount that one Contributes.

You keep making reference to DC 401(k) style plans. That is irrelevent to the point I am trying to make. I never mentioned 401(k) style plans in my initial request introduced them into the discussion.

As you noted, a DB Plan, under "ideal conditions" can be workable and sustainable.

But we all know that we don't, nor will we ever, have "ideal conditions" when you have a DB Plan run by pandering Politicians and uninformed greedy beneficiaries.

How do I know this? Just look at the condition of the RI Pension Fund, which had a $5B shortfall (first or second largest in the nation) BEFORE the market crashed, losing 30+% in value.

RI's DB Plan does NOT work for several reasons ...pandering politicians diverting funds to special interest projects, unpredictable and uncertain investment returns and most importantly, overly generous payouts relative to what one contributes (which is the piece that I'd like demononstrated by one of your models).

But at the end of the day, it doesn't matter who's fault it is that it doesn't work. The only thing that matters is that it doesn't work, evidenced by the current insolvent condition and the fact that guys like Bob Walsh continue to advocate for it by telling us things will be fine in 20 F'ing years. They also told us 6 months ago that we had a balanced budget!

When a smart individual finds themselves in a hole, they stop digging. That's what we need to do.

Which transitions us to your 401(k) discussion. We need to acknowledge that a DB Plan for RI Public employees just does not work, for lots of reasons.

However, a DC 401(k) style plan, like it or not, does NOT lend itself to the abuses that make a DB plan unworkable for Public Employees.

But the first step is to educate the beneficiaries (and the dopey pols that protect them) as to the GUARANTEED and unsustainable payouts that they Receive relative to the modest Contributions they make. Very simply, we need to show them that through their ignorance and greed, they killed the Golden Goose.

No amount of investment returns and Taxpayer/Employer Contributions could ever keep up with the unsustainable number of eggs they demanded be pulled out of the poor Goose.

So why don't you humor me and prepare a simple analysis demonstrating the amount one Contributes vs the Guaranteed Amount one Receives. You can put a disclaimer that the Contributions may or may not yield investment returns (or losses) which could help narrow the gap between the meager Contributions and the overly generous and unsustainable Payouts.


Posted by: George Elbow at December 10, 2008 7:36 AM

My God, we might actually be approaching a common understanding. You say...

But the first step is to educate the beneficiaries (and the dopey pols that protect them) as to the GUARANTEED and unsustainable payouts that they Receive relative to the modest Contributions they make. Very simply, we need to show them that through their ignorance and greed, they killed the Golden Goose.
You're almost there, but not quite all the way yet. You can never prove that a system is unsustainable if you ignore the investment growth, because you'll be ignoring a large chunk of money that may actually be there.

But if you can show that a particular payout schedule is unsustainable, even when you include the investment growth, then you'll be making a convincing argument that the system doesn't work. Once you accept that, then it's possible to start figuring out how large single-year investment swings will impact the system.

One argument that will never work is saying that 401(k)s don't need to be held to the same basic standards of fiscal sanity that DB plans are.

Posted by: Andrew at December 10, 2008 10:21 AM


DC 401(k) plans indeed need to be held to the same standards as a DB plan.

That being said, it is inarguable that DC plans by their very nature do NOT lend themselves to the abuses that a DB Plan does, given that a DC plan by definition can only pay out that which has accumulated in the fund (via contributions, earnings/losses, employer/Taxpayer matches).

Said differently, pandering pols can not make "promises" they can't keep via a DC plan, whereas with a DB plan, they can (and do) make promises that, by virtue of the plan being a DB plan, must be kept by hosing the Taxpayers.

Also, I don't propose that we should ignore investment growth. I merely want to demonstrate the gap between what is Contributed versus what is Received, knowing full well that the difference must be made up by Employer/Taxpayer Contributions AND unpredictable and uncertain earnings.

I would posit that the biggest (albeit not the only) issue we have with the current DB Plan is that the payouts are overly generous.

When we are paying people starting at age 59 (i.e. they could easily Collect for as many years they Contributed) at 75% of the high 5 years and letting that grow by 3% a year starting in year 3, it takes a hell of a lot of Taxpayer Contributions and Investment Earnings to cover the Gap between Employee Contributions and Benefits Received.

I'm not sure I need a lot of analysis to prove that what we currently have in place is Unsustainable. Don't forget, we ARE strating from an already insolvent position.

I also know that the 8.25% returns Bob Walsh likes to throw around are not realistic over the long haul.

Indeed, we have had years where the returns far exceeded the 8.25%. But too often the gains are given back in spades, as is the case this year.

So here is a compromise position:

If, as you correctly noted, a DC 401(k) Plan and a DB Plan essentially make the same investments and, as such, are subject to the same investment returns, then why don't we simply move to 401(k) Plans.

We'll tell the Public Employees that:

1) they will make the Same employee Contribution into the 401(k) Plan that they are currently making into the DB Plan.

2) The taxpayers will contribute the Same rate that Bob Walsh proposed we contribute using his Walshian Assumptions under the DB Plan with the 8.25% investment return assumptions.

3) They too can assume Walshian 8.25% returns in their 401(k), but

4) The payouts will obviously NO longer be Guaranteed and No longer Grow automatically at 3% annually. Rather, the payouts will be whatever they want them to be within the confines of the balance accrued into their plans ...but not to worry, as Bob Walsh has already assured them that their funds will grow 8.25% annually ...just like home values always go up.

They should be willing to go for that, right? Do you think they might challenge the assumption that they can count on 8.25% investment returns each year, as Mr. Walsh has suggested?

My guess is that, similar to those that chose (because they could afford to due to nutty retirement benefits) to forgoe a weekly salary and retire in their 40s and 50s in order to avoid "cuts" in nut-bag health benefits, most will quickly come to the conclusion that the Guaranteed NO RISK Benefit they have been receiving in return for their minimal contributions is not something they will easily part with.

So with that, do you think you could humor me and present two tables ...1) showing the E/E Contributions and the Payouts, the Gap being that which must be made up by Taxpayers and Investment Returns and 2) a similar table layering in Investment Returns, but at 5% annual, not 8.25%.


PS - thanks for hanging in there (and sparring) with me on this subject.

Posted by: George Elbow at December 10, 2008 2:46 PM
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