July 21, 2010

We Didn't Agree to That

Justin Katz

As Marc noted yesterday (and as we've been talking about for quite some time), Rhode Islanders are due to see their annual expense for public-sector pensions grow into the foreseeable future. I wonder how much issues such as this have contributed to the increasing disaffection with government.

Partly, that angst is a function of the feeling that there's now a ruling class that cannot be dislodged from office notwithstanding our ability to vote. Partly, it's the realization that the public-sector has insulated itself from the effects of the recession, at the expense of everyone else. (The supposed "stimulus" programs count, too). But pensions are a hard, cold fact that surely prods many private sector residents toward the opinion that our representative government doesn't really speak for us, and that we are not really responsible for the promises that it makes.

From the second link, above:

Republican Governor Carcieri had urged the General Assembly to eliminate entirely the promise of any cost-of-living increase, leaving it to the General Assembly to decide how much — if anything — the state could afford to give its retirees in any given year.

But the Democrat-dominated General Assembly was unwilling to go that far in an election year.

That was a decision they made, and it's easy to question — philosophically and practically — why they have such power over our money. Look at the language that even reporter Katherine Gregg uses (emphasis added):

To keep the promises state lawmakers have made over the years to more than 50,565 current and future retirees, the state will have to increase its contribution to the pension fund from 20.78 percent to 22.98 percent of payroll for employees.

And the pension system was built with such unrealistic expectations for a return on investment (8%, I believe) that the entire thing leaves the aftertaste of an illegitimate scam:

In their report, they noted the fair market value of the state's pension portfolio had dropped from $7.88 billion to $6.07 billion during the critical 2009 period they looked at, the rate-of-return on the investment of these dollars was minus 20.1 percent that year and despite some good years along the way, the state's "average market return for the last 10 years is 1.83 percent."

At the state level, of course, residents can change their entire slate of representatives by moving. Those who remain may or may not be able to oust the old guard, whether or not the individual representatives change, but perhaps there's reason to hope that more folks are asking themselves what "representative" ought actually to signify.

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It can't happen here?

Ur-Fascism is based upon a selective populism, a qualitative populism, one might say...

Having lost their power of delegation, citizens do not act; they are only called on to play the role of the People. Thus the People is only a theatrical fiction. There is in our future a TV or Internet populism, in which the emotional response of a selected group of citizens can be presented and accepted as the Voice of the People.[my emphasis]

Because of its qualitative populism, Ur-Fascism must be against "rotten" parliamentary governments. Wherever a politician casts doubt on the legitimacy of a parliament because it no longer represents the Voice of the People, we can smell Ur-Fascism.

Posted by: Russ at July 21, 2010 9:56 AM


The state doesn't expect a return on investment of 8-percent. It expects a return on investment of 8.25 percent, which is significantly more. When someone like you, who pays such close attention to current events and public affairs, doesn't known the extent of the problems in Rhode Island, we're doomed.

Posted by: Rasputin at July 21, 2010 2:04 PM

My prediction for FY 12 is $600 million deficit.
I believe as enacted it was 350.
Add 100 for the Medicaid bailout that is gone.
60 more in pensions.
Another 100 lost to MA in slot revenue.
Unless President Superfly rams through another union bailout (oops i mean stimulus) look for a 9% (temporary-LOL) sales tax.
And even that won't do it.

Posted by: Tommy Cranston at July 21, 2010 7:15 PM


Actually, I knew it was 8.25%, but not with the confidence required not to check, so in a hurry to write the post, I figured 8% was a nice, safe round number that really isn't significantly different when we're comparing it with the 1.83% actual results.

Posted by: Justin Katz at July 21, 2010 7:57 PM

After spending 17 years with the State of RI in a Federal funded management position and having to wait till I reached the age of 65 to start collecting $800 dollars a month after taxes which is “grossly over generous by some folks standards” and having the COLA tied to the consumer price index CPI) or 3% whichever is lower, I don’t understand the problem (It’s a good that I invested for retirement on my own because $800 and social security monthly payment you can’t live unless you are on welfare).

The RI pension laws were changed back in 2005. If you were not vested by a certain date you fall under the new rules and if you did not have minimum years in service you have to wait till age 65 to start collecting your retirement with a COLA tied to CPI or 3% whichever is lower after a 3 calendar year wait.

This year (2009) the changes made are now the average of last top 5 years instead of average of top 3 years. Increasing the years for minimum age of retirement, reducing the disability payment percentage and bringing new judges under the 5 year average and 80% instead of 3 year 100%. State of RI has been chipping away the retirement benefit.

RI still leads the nation with the most expensive retirement employee contributions and least amount returned per dollar invested.

The increase in payments is due in fact to poor performance of the retirement fund investments, 20 year underfunding payback schedule and the fact that the state of RI employees, teachers and municipal employees have been funding with 100% of their money and the state has continued to underfund the pension system.

In other words the state of RI is trying to play catch up with its legally binding obligation to the current retirees that it would fund the pension fund at the agreed rate which it has not. To my knowledge the State of RI still owes the retirement fund $19 million it borrowed during the savings and loan crises.

A similar scenario played out in Hawaii and the union and retirement board ended up in HI Supreme Court which ruled against the state requiring the state to provide a firm-fixed retirement fund pay schedule to the court.

Also, if the State of RI moves to a hybrid 401K retirement system, they lose control of matching funds required payments. In other words by law the state has to make the agreed matching payments regardless plus the old retirement system would still have to be funded. This would cost the state over an estimated $500,000 million extra alone.

I don’t think State of RI nor the taxpayer wants to get into either one of those positions.

Posted by: Ken at July 21, 2010 8:09 PM


You only fortify my point (using the generalized "we" from the post: We didn't agree to that deal. We didn't underfund the pensions. For the most part, we didn't elect the people who did. It would be more true to say that the public-sector unions elected them and then failed to exert their influence to ensure that the system was functioning properly. The entire scheme has operated under the assumptions that, when it came down to it, when 8.25% expected returns failed to materialized, when poor governance that wasted money and drove out revenue-creators, brought the bill due, then the taxpayers would just have to take it.

The system has to end. That means 401Ks for new hires and current employees, a freezing of the current system at now-vested levels, and an end to automatic COLAs.

Posted by: Justin Katz at July 21, 2010 8:24 PM

"It would be more true to say that the public-sector unions elected them and then failed to exert their influence to ensure that the system was functioning properly."

That's correct, although we can narrow that slightly to say that the "public-sector union leadership" failed to ensure that the pension system was properly funded.

"The system has to end. That means 401Ks for new hires and current employees, a freezing of the current system at now-vested levels, and an end to automatic COLAs."

My understanding is that, with an unfunded liability at 40%, those measures will not be sufficient.

Let's not forget as this deteriorates that it was three decades of a Democrat controlled General Assembly which deliberately, egregiously refused to fund - actually diverted funds away from - the pension system that they themselves had promised to hundreds of thousands of public employees.

Posted by: Monique at July 21, 2010 10:04 PM


If you have been a legal resident of the State of RI since January1, 1991 and thereafter Gov. Bruce Sunderland started the “gross” under funding of the RI State retirement system.

If you were a voting member of the general public you are part of the so called “WE” and you had a voice and a vote to stop it or alter it as the rest of us living in RI.

By your silence along with the rest of us you are just as guilty as the rest of us and this has continued across all party lines both Democrat and Republican with the greater percentage of Governors being Republicans (2 out of 3) and a Democratic controlled GA.

It’s interesting that you would stand or place yourself on a rightist high pedestal and say “We didn't agree to that deal. We didn't underfund the pensions. For the most part, we didn't elect the people who did. It would be more true to say that the public-sector unions elected them and then failed to exert their influence to ensure that the system was functioning properly.”

I can see the State of RI going the way of the State of HI and ending up in Supreme Court and being ordered to pay at a rate that the residents of RI would not like with talk and attitude like this.

State of RI is years into a current 20 year unfunded liability restoration to balance the fund. The schedule is working but this last year was a bad investment year and the difference has to be made up to keep on schedule to reduce compounding interest costs.

As for any new retirees they now have a total set of new retirement rules and benefits dating back to 2005 so you misguidedly pointing the finger at retirees and COLAs are disingenuous to all especially since they have been making 100% contributions in accordance with the law all along.

As far as COLAs are concerned, you have your choice; COLAs are now tied to cost of living index or 3% whichever is LOWER after a 3 calendar year wait or retirees going on welfare which taxpayers provide greater funding because it is a combination of Federal and state dollars collected from taxes.

Everyone of us will grow old and at least in State of HI seniors (50 and older) are allowed to live with dignity.

Posted by: Ken at July 21, 2010 11:25 PM

"The system has to end. That means 401Ks for new hires and current employees, a freezing of the current system at now-vested levels, and an end to automatic COLAs."

And police/fire also. At the municipal level this is problem 1.
Providence alone has over a billion dollar unfunded pension liability and no way to ever pay it.
Retired firemen get pensions up to $160K a year as per yesterday's projo.
Plus health care. Plus COLA's for life.
Public pensions can no longer be a game of "Who Wants To Be A Millionaire?".
Put them all (police and fire INCLUDED) into 401k's plus social security and that's IT. They get SSDI if "disabled"-no more get a bad back, grab a check and start a business.
If they don't like it-welcome to "the lucrative private sector".

Posted by: Tommy Cranston at July 22, 2010 9:50 AM
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