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Riley: Providence Debt is Epic Disaster, Other RI Towns Even Worse

Tuesday, January 14, 2014

 

Even after reforms, Providence is still saddled with an enormous debt burden that currently, according to my research, obligates each household to $35,000 in pension and benefit debt. That number compares to debt burden of $20,000 per household in Detroit. Recent reforms negotiated by the Providence City Council and Mayor Angel Taveras did not come easily and have only marginally helped the financial picture in Providence.

The problem is officials didn’t provide an accurate picture before the reforms. An accurate accounting shows, that debt obligations will soon lead to higher taxes and layoffs and reduced services. Unfortunately, the commercial property tax rate is already the highest in the country, exceeding that of bankrupt Detroit. Mayor Taveras has appropriately declared a freeze on commercial taxes.

Critical status

Providence’s council and the mayor formed study commissions in 2011 and 2012 . The situation was very serious, but even after being presented with a litany of facts and figures, as well as the harsh testimony of the current and former Auditor Generals, only some of the suggested reforms were implemented.

That very modest effort to right the ship was inadequate, to say the least. Providence remains one of the worst funded plans in the country and is still officially in “critical status”. Over the last 10 months I have studied plans across the nation and according to the work of my Stanford Graduate School of Business team, it appears Providence city officials and their actuaries have been using questionable data in their analysis. Not only is the discount rate used for plan assets and liabilities inappropriately high, but plan assets have been overstated by at least $100 million.

Risks understated

Technically, actuaries are allowed to use smoothing methods for one more year, according to Government Accounting Standards. But given Providence critical status, asset smoothing was completely inappropriate.

Actuaries calculating pension liabilities behave much like Credit Ratings Agencies, who famously understated the risk of Wall Street’s bundled financial products.That behavior led to a disaster. Pre the Taveras reforms of last year and under the previous Mayor, Providence’s Unfunded Actuarial Liabilities were stated as $903,000,000 and then according to official City reports, after-Taveras reforms, the UAAL was reduced to $739,000,000.

Progress?

Not so fast!

The purposeful overstatement of plan assets is particularly revealing given the ease of obtaining the real time actual figures. Any adviser can with 99% accuracy, produce a daily figure.

I am in the business, so I know.

Selection of an appropriate discount rate was a huge subject in our Stanford course and on our team. When appropriately adjusted, Providence’s real liability appears to have been understated by over $600 million. An accurate UAAL is $1.35 billion., which is significantly worse than the Category 5 pre-reform figure of $903 million that spurred the latest reforms. The picture gets worse by appropriately adding the OPEB liability of $1.5 billion to pension liability. Providence has a $2.85 billion dollar problem.

The annual minimum required contributions, or ARC, for pensions and OPEB add up to approximately $170 million , leaving only $160 million in tax revenue to spend on running the city. This precarious situation is after the negotiated elimination of 6% colas and includes all the recent hard fought reforms. These changes are too little too late and the road to receivership may be extremely short. My early analysis using the same template shows West Warwick and Coventry are even worse and in my opinion both will be in receivership by year-end.

More urgency and significantly stronger actions are necessary. My intention is to take a deep dive into every town and explore all the facts as well as the causes and potential solutions. Next up, West Warwick.

"Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC news, Yahoo TV, and CNBC.


Related Slideshow:
New England States With the Most State Debt

Prev Next

6. Vermont

Debt Per Capita: $12,566

National Rank: 36th Most

Total Debt (in thousands): $7,866,666

National Rank: 49th Most

Debt as a Percentage of Gross State Product: 29%

Prev Next

5. Maine

Debt Per Capita: $12,577

National Rank: 35th Most

Total Debt (in thousands): $16,717,250

National Rank: 42nd Most

Debt as a Percentage of Gross State Product: 31%

Prev Next

4. New Hampshire

Debt Per Capita: $13,951

National Rank: 27th Most

Total Debt (in thousands): $18,425,567

National Rank: 41st Most

Debt as a Percentage of Gross State Product: 28%

Prev Next

3. Rhode Island

Debt Per Capita: $17,960

National Rank: 16th Most

Total Debt (in thousands): $18,863,153

National Rank: 40th Most

Debt as a Percentage of Gross State Product: 37%

Prev Next

2. Massachusetts

Debt Per Capita: $19,493

National Rank: 12th Most

Total Debt (in thousands): $129,550,263

National Rank: 10th Most

Debt as a Percentage of Gross State Product: 32%

Prev Next

1. Connecticut

Debt Per Capita: $31,298

National Rank: 3rd Most

Total Debt (in thousands): $112,372,072

National Rank: 12th Most

Debt as a Percentage of Gross State Product: 49%

 
 

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Comments:

Odd Job

Good stuff. We have to eliminate public sector unions. Raimondo, Fung, Taveras, Gump, Fox, Paiva-Weed, all of them - their efforts and talk and blah blah about RI's future will be utterly in vain until this big gorilla is slain.

RI's economy is just not strong enough to support itself and a good size population of 1%'ers known as gov't workers.

David Beagle

Mr. Riley, do think for one second that any unionized middle school janitor, or cooks' helper, or ANYONE effected by the pension mess, understands one word of this piece?

michael riley

David ...good point...not yet is the answer ..by the time im done ..everyone will understand

Jeffrey Brown

A couple points:
1. Acturial firms should not be hired and paid for by the municipality. Perhaps a blind pool, not unlike assignment of home appraisers. Are any state reps listening?
2. As Mike well knows and could probably be effectively communicated with some probability analysis from the Stanford team, the next national economic downturn WILL be an unrecoverable knockout blow to all of these plans and the state.

michael riley

Jeff is correct. The discount rate assumed by actuaries is a single figure of say 7.5%. However there is a distributions of possible returns that can be estimated based on actual investments and investment characteristics.The probability of a less than a 7.5% return in the upcoming year exceeds 7.5% and if substandard returns materialize ,the situation deteriorates rapidly.Providence is in a negative amortization condition and thus exposed to relatively likely below their target returns on assets.

michael riley

the above statement in response to Jeffery should describe the probability of a less than 7.5% return as greater than 50%..

Stephen DeNinno

Michael, I want you to prove to everyone the statement of 1.5 billion in OPEB. The only OPEB is health care. If this was accurate, the city would be paying a billion dollars a year for health care alone. Pretty good considering the total city budget is 668 million dollars. There will never be more people retired than there are right now. And with the pension reform, everyone moves to Medicare at 65. At the most, the city will be paying for only the healthcare retirees use since they are self insured, for 10 years. Where do you get this 1.5 billion debt??????? The city has had healthcare for retirees for 30 years. Your costs analysis just doesn't add up.

Stephen DeNinno

These are the scare tactics used to steal COLAs. They take a figure, that in itself is untrue. Actuaries use the unfunded figure as if everyone working in the city would retire today, and no new employees would be paying into the system. That is how they come up with the "unfunded liability".

michael riley

Steve as i have been saying all along and will now expose over the next several weeks..there is a serious problem in nearly every town in Rhode Island that has been ignored for a long time and threatens every citizen.I know you have been paying close attention. I have not included the move to medicare at 65 in my calculation and my estimate is that will help reduce OPEB debt by about 15% or so (roughly 1.2 billion). But here's where I got the $1.5 billion OPEB number. I got it from Testimony before the commission studying Pension and OPEB problems in Providence. Report issued April 19, 2012.

The testimony was from Ernest Almonte...According to Mr. Almonte, the most significant portion of the Review Panel Report is
6found on page 2 of the report, which indicates the following, as of February 2011 :


Budget Realities Amount

The City’s 2011 Budgetary Shortfall: $ 28,613,000

The City’s 2012 Budgetary Shortfall: $ 109,902,000

The City’s Unfunded Pension Liability: $ 828,484,000

The City’s Unfunded OPEB Liability: $ 1,497,451,000

Mr. Almonte explained that the budgetary shortfalls for 2011 and 2012 were “structural deficits,” meaning that if the City fails to address this shortfall it will continue to “repeat itself year after year.”
Mr. Almonte warned that the structural deficit together with the growing costs of the unfunded pension and OPEB liability would “destroy the City if they are not addressed.”

bill bentley

But Angel said he's fixed all these problems and soon he will fix the State's problems. Or was that Solomon? Where's Bill Fischer when you need some good spin? All philosophies and ideologies are a smoke screen for one's own economic (political?) self-interest.

Ben Algeo

Michael:

You state the discount rate is inappropriately high. What rate is being used? Also, I am pretty sure plan assets were correctly stated, and given that you disputed the liabilities total, I think you mean plan net assets were overstated. Regardless, I agree with your conclusions, but would also love to see you craft a schedule or chart that shows the actuarial estimates of plan disbursements for pensions and OPEB over the next 5 to 10 years for all cities and towns. Juxtapose that information as a percentage of an estimated total budget for each respective city or town and put that in front of people. I believe that may prove to be a powerful argument supporting the seriousness of the financial calamity facing most cities and towns.

Robert Cushman

For those who may ask, “What effect does all this debt have on the city budget”, here is the answer based on what has occurred in the City of Warwick over the past ten years.

The following figures represent the dollars by budget category allocated in the city budget and the percent of the overall budget of each category in 2004 and in the current fiscal 2014 budget.

Employee Benefits,
2004 - $30,303,158 - 31% of budget
2014 - $53,842,019 or 43% of budget (10 year chg +77.6%)

Physical Resources (DPW),
2004 - $11,487,266 or 12% of budget
2014 - $14,471,080 or 11% of budget (10 year chg +26%)

Social Services
2004 - $6,668,351 or 7% of budget
2014 - $5,459,873 or 4% of budget (10 year chg -18%)

Public Safety (Police and Fire)
2004 - $33,239,838 or 35% of budget
2014 - $39,279,721 or 31% of budget (10 year chg +18%)

Executive & Admin
2004 - $14,042,406 or 15% of budget
2014 - $13,269,390 or 11% of budget (10 year chg -5.5%)

Now look at the allocation of new revenue into city budget since 2004:
Salary, sick pay, etc - $6,632,867, or 21.7%
Active Employee Healthcare, $6,174,191 or 20.2%
Retiree Pension & Healthcare $15,996,209 or 52.3%
All other expenses, $1,777,797 or 5.8%

That means less than 6 cents of every new dollar allocated to the city budget over ten years went to non personnel related expenses. How couldn't this have an effect on programs and services?

And it’s going to get worse, because the amount of dollars needed for retiree benefits is increasing each year.

Warwick’s liabilities:
Pension Liability $628,776,187
Other Post Employment Benefit Liability (OPEB) $283,220,644
Total Liability $911,996,831
Pension Assets: $322,067,214
OPEB Assets: $0
Pension overall funding ration: 51.2%
OPEB overall funding ration: 0%
All benefit funding ration: 35.3%

One example of the extent of the problem: The funding improvement that was required by law to be submitted to the state for Warwick’s Police/Fire I pension plan will result in $314 million being spent over the next 14 years to reduce the accrued liability in the plan by $4.6 million. The total unfunded liability will still be over $200 million after paying over $300 million.

That improvement plan was described as "reasonable" by Warwick Mayor Scott Avedisian when he testified before the state commission. The actuarial expert testified before the city council that, "It's not my job to tell you whether you can afford to fund it nor not. My job is to tell you what it costs".

So in effect city and state leaders simply accepted the improvement plan that on paper will solve the problem. No analysis was performed to determine if the city can continue to provide the funding necessary to keep all city and educational services while also paying this debt. My assessment, the improvement plan isn’t worth the paper it was printed on.

Additional facts that demonstrate the scope of the problem:
Since 2007 the local property tax dollars to the city has grown from $63,927,230 to $99,568,368 today for a 55.7 percent increase. School allocation in 2007 was $113,125,355. Today its $118,644,632, for a 4.8 percent increase.

That means practically 100% of the local property tax increases over the last 7 years has gone to the city budget.

Wouldn't you think that if the public safety, DPW, and Social Services budget would at least remain at the same level of the overall city budget over ten years that more programs and service could be offered to the citizens of Warwick?

For example for the Public Safety budget to remain at the same 35% of the budget in 2004, it should be budgeted at $44,2 million. That $5 million more than the current level. I guarantee the Police and Fire department could provide more services and use the new equipment to perform their jobs.

The Social services budget is down 18% from ten years ago. If it was at the same percent of the budget from 10 years ago, it would be at $8.8 million. That's $3.4 million more. With those funds the youth programs that were eliminated and the other family service programs eliminated could still be offered.

DPW would require $126,322,083 * .12 = $15.2 million - $14.4 million (2014 allocation) = $800,000. Just think how many miles of road could be repaved with that new money.

If Employee benefits remained at 31 percent of the 2014 budget, $39.1 million would be allocated to it instead of the current $53.8 million, freeing up $14.7 million to go to all the other departments in the city. Imagine what an impact that would have on the services provided and aid in the police, fire and municipal employees to do their jobs with better equipment and better training and more employees.

Those numbers above prove that even with tens of millions of new tax dollars flowing into the city budget over the last ten years, it is not enough to pay for these benefits. The cost of the benefits is not sustainable even with city department budget dollars and school dollars being siphoned off to help pay these expenses.

The amount of new tax dollars required to pay for these benefits is going to continue increase every year. That means less and less will go to the Police, fire and DPW and schools.
Unless the Warwick economy can produced millions of dollars in new tax revenue (which I doubt it can), more and more programs and services will be cut. At some point all the departments are going to find it difficult to function like this.

The solution - reform retired employee benefit programs. Real reforms that cut cost today, not Mayor Avedisian’s pension reforms that didn't cut one penny in the over $900 million in liabilities.

michael riley

Ben, one metric that speaks to both numbers oriented people AND the average person is "What Percentage of our taxes annually are being spent for promises made but not paid for." This ratio of these promises turned to debt, paid from current tax levy show's that all other services, importantly essential services will be crowded out and public workers will be eliminated, libraries closed , street lights dark etc if that ratio is too high. Central falls reached 50% of tax levy just paying pension and health care debt alone before filing chapter 9.There was precious little revenue to pay for services and no one to tax more. Providence is there right now. I will show this "crowding out" effect for every town.

michael riley

Robert Cushman those numbers look right and very concerning . I will be reviewing Warwick in the Spring. We need more citizen watchdogs like you. Almost all the data I have is easily available.

john paycheck

I am not sure why anyone would want to be mayor of providence.

you either have no idea what you are getting into in regard to finances. or ?????

I mean this will be rearranging the deck chairs on the titanic.

car taxes, house taxes, business taxes are already sky high. colleges are making payments, the schools are falling apart, roads are a mess,

the mess ciccilini left behind... you really have to wonder how anyone could support him. he was completely out to lunch.

oh well. i'm glad I don't live or work in providence.

mike, when does the providence pension plan run out of money and all pension must be paid out of the current budget.?

Stephen DeNinno

Mike, again Ernie Almonte is scaring people into thinking the sky is falling. There are never going to be more people retired than there is today. Where are the billions? The city's entire budget is 668 million. The city never would tell an arbitrator what they really paid for health care. Because it was never this monstrosity that they make it out to be. The city is self insured. I will use my self for an example. I have been retired for 9 years. I have used about 8 thousand dollars in HC between me and my wife. The city paid less than 900 dollars a year for me. Now that's not saying someone with heart disease or cancer won't drive the cost up, but that is my example.

michael riley

providence really only has about 290 million in investments thought they claim $422 million. They spend nearly $100 million a year on benefits and collect about $18 million in normal cost contributions(both employee and employer).The other contributions ,ARC or percentage of ARC have been around $50 to $60 million a year and is paid out of tax revenues..so you can see they are in negative amortization. If they stop paying the ARC the plan is bust in a little over 3 years. because plan assets are overstated and liabilities understated , the ARC is also understated. Meaning proper funding will crowd out other uses for tax revenues...like employee wages, infrastructure etc.

michael riley

Stephen I am with you on trying to save retirees money. But the math is very real. Virtually no professional buys your argument about funding healthcare.So the question becomes how do we fix this? Who should pay? I dont like the Taveras solutions. More should have been done to help low benefit retirees. Id rather not touch any retiree but certainly guys making $25000 or less should be immune. Taxpayers have already been slammed but maybe more should happen. Supplemental tax. Also no more new hires on this plan .Make it hybrid or defined contribution,. this will hurt the younger guys but at least they know it will be there.The city will need to sell assets ,privatize functions etc.

Robert Cushman

Mr. DeNinno you are missing the point in that the amount of dollars being allocated to fund these benefits is not remaining steady but substantially increasing. Providence is in much worse shape then Warwick but look at the numbers I posted comparing Warwick's municipal budget 10 years ago to today.

Not only is the city side of the budget requiring almost all of the tax dollars from Warwick's annual property tax increase, the departments throughout the city and the school department is being reduced to pay these expenses.

If this debt was like a mortgage and the payments were reducing the principal over time, there could be an argument to stay the course. But that's not happening, as demostrated in warwick. Hundereds of millions of new tax dollars will be need before significant debt principal is reduced. That's not sustainable.

Not only will citizens and school children feel the effect but active employees are going to feel the sting with little to no raises and ranks being reduced while taxpayers ask them to perform the same level of services.

Stephen DeNinno

First, I am not missing the point. These shortfalls are the fault of politicians that put NO or little money into the pension system. Buddy Cianci was the worst. We took him to court and lost (Flanders wrote the decision) It has been used as a slush fund for 50 years. That is the problem. Cicilline had the only solid solution. A bond issue to make the pension whole. That was shot down by the GA. They would have been paying less in bond payments than the ARC. And lastly, let us not forget the Don Carcieri trickle down theory. Gut cities and towns to the point of BR, and tell them to eat cake. I am in no way saying we are not in trouble. I am saying in your research, please have the balls to tell it like it is Mike. Name the names and the amounts they didn't pay in. It's all the rage to blame unions, that's the GOP's mantra. That is all.

michael riley

I will get into the causes because its very imp[ortant ...the unions are not blameless but Steve i can tell you early review says lack of funding ,perhaps purposeful ,is the biggest cause of this problem and its exactly why i want to move away from defined benefit plans. Politicians and unaccountable appointees have discretion to both negotiate with unions and fund or not fund their promises. Its a recipe for corruption.

Walter Miller

Very interesting interchange. After reading (understanding-?) it, does anyone really wonder why Taveras is looking for the first train out of Dodge? Like his mentor David Cicilline, despite all the glowing hyperbole during his election, Taveras has little interest in addressing the city's problems over the long term.

Art West

Michael,

Numbers are indisputable, and yours and Robert Cushman's bring the problem into clear focus.

As for the cause, you've nailed it here:

"Politicians and unaccountable appointees have discretion to both negotiate with unions and fund or not fund their promises. Its a recipe for corruption."

The temptation for politicians to use other people's money to ensure their own political futures will always be the problem. That's why government pensions have to be in the hands of each pensioner via 401(k) or similar plans -- and out of the hands of politicians who buy votes with promises.

Walter Miller

@ Art West:
You make a valid point.
However, let's not let RI voter's escape some of the blame for this problem. After all, who votes (over and over again) for many of the very same politicians who got us into this mess.

Never underestimate the "influence" some pizza 'n coffee (or in Sen. Whitehouse's case, spaghetti dinners) has on governmental decisions!
It's way past the time when voters need to take responsibility for their political choices.

Art West

Spot-on Walter!

Jackson Teller

Why don't you think Tavares the rat face scum is running for gov. After the mayoral election in Prov there will be another category 5 Hurricane. If you trust Taveras the you must also believe his marriage isn't fake and that is his child. The truth will come out ANGEL after all from head start to havard on taxpayers dime.

G Godot

No wonder Tavaras wants out of Dodge. Maybe he can get a Federal job coddling illegals. When it's time to coddle, they print it or borrow it from the Chinese. The Chinese saw our weakness long ago, just lent them enough money and THEN slap the handcuffs on.

G Godot

No wonder Tavaras wants out of Dodge. Maybe he can get a Federal job coddling illegals. When it's time to coddle, they print it or borrow it from the Chinese. The Chinese saw our weakness long ago, just lend them enough money and THEN slap the handcuffs on.




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