Is RI’s pension liability really $6.5B, not $4.4B?

Pensions pensions pensions.

I could probably spend all my time writing stories about the arcane ins and outs of the state’s public pension system and never run out of stories. (Whether I’d run out of readers is a separate question.) But a document released this week contained a small bombshell I wanted to point out.

When it comes to the pension system, the problem everyone usually talks about is the “unfunded liability” – basically, the amount of money the state has promised to pay out in pensions over the next couple decades for which it hasn’t set assets aside to cover. And each time we write a story about the unfunded liability, we cite the same dollar amount: $4.4 billion.

That number is based on a host of technical assumptions made by the state’s actuaries, from how soon retirees will go to their reward to how much they’ll be making at retirement. But one of the most important of those assumptions is the state’s future investment return.

Right now, Rhode Island assumes its investments will grow 8.25 percent a year before inflation. But from 1999 to 2009, the average annual return was actually 2.02% – only a quarter of what we expected.

No doubt, that’s an especially gloomy time period to use for comparison purposes, since it starts amid the dot-com bubble and ends just months after the worst of the financial crisis. And I’m not suggesting we should switch to a 2.02% assumption.

Still, Frank Caprio suggested in March the state should consider revising expectations downward, especially since our 8.25% is even higher than the estimates used elsewhere in the country. But if we assume a poorer investment return, that means we need to shovel more money into the pension system now to make sure it has enough assets in the future. In these tight fiscal times, that’s an unappetizing prospect to say the least.

An indication of just how much money we’d owe was buried in a June 1 memo to the treasury by Gary Bayer, an actuary at the big broker Aon, that Caprio’s office released this week. Aon was asked to estimate how much larger the unfunded liability would be if we assumed a 6% return instead of an 8.25% one, and here’s what Bayer came up with:

If liabilities were valued based on a 6% rate instead of the current 8.25% rate, we estimate that the unfunded liability would increase from $1.7 billion to $2.7 billion for the state employees and from $2.7 billion to $4.6 billion for the Teachers.

For the mathematically challenged, that’s an increase in the unfunded liability from $4.4 billion to $7.3 billion $6.5 billion, or nearly 48%. Just something to keep in mind as the candidates discuss their pension plans during our televised gubernatorial debate tonight at 7.

Update: As you can see from that correction, the “mathematically challenged” clearly includes yours truly. Mea culpa.

1 thought on “Is RI’s pension liability really $6.5B, not $4.4B?


    Obviously, legislators around the country are not quite as sophisticated as their counterparts in Colorado. It has never occurred to them that they could just pass a bill stating “Oh, by the way, we are no longer bound by our contractual pension obligations.” Simplicity itself! This approach makes life much easier in difficult budgetary times, and takes the burden off of GASB, state and local governments, plan sponsors and the SEC!

    Under the Colorado pension “contract breachin’ plan”. . . . . you simply seize vested, accrued, earned, contracted benefits from retirees and pension members (incredibly, with the help of your local union lobbyists . . . . toss those retired union brothers under the bus) until your unfunded pension liabilities are sufficiently reduced to raise your funded ratio. This plan also improves the status of your bonded debt (keepin’ those SEC fellas happy).

    If you’re as brazen as we are in Colorado you claim that your goal is to achieve a 100 percent funded ratio, instead of the 80 percent level that is considered well-funded in the industry. May as well go for the full 100 percent, no one understands all this pension mumbo jumbo out here in the west.

    The 100 percent goal provides lots of wiggle room for unexpected investment shortfalls, or more convenient under-funding in the future. Also, here’s another ingenious provision that we invented. If it happens that God provides you with a lame pension investment staff, they consistently underperform their benchmarks (I estimate that last year we underperformed by about a billion), and accordingly you have an investment loss for the year, no problemo, just state in the bill you enact that retiree contracted benefits will be further cut to accommodate the loss! My guess is that when pension investment staff around the country hear about this sweet no-accountability gig they are going to beat a path to Colorado PERA. Where can I get that kind of a job? To be fair, credit for finding this solution should go to the bright administrators at Colorado PERA. You can imagine how difficult it is psychologically to advocate a course of action that you yourself have earlier declared illegal, (see this excellent Denver Post article.)

    We know it’s burdensome for busy pension administrators (particularly short timers) to have to tell elected officials that they really ought to make their annual required contributions . . . it’s much easier to just let those unfunded liabilities build up year after year after year, until you have a good pile, and then wipe the slate clean with a good contract breachin’!

    Our Colorado PERA pension administrators are straight shooters. They’ve been telling us for a couple years now, “We can’t invest our way out of this.” Now they’re keeping their word . . . by missing their investment performance benchmarks by wide margins.

    Meeting contractual obligations? Performing your fiduciary duty? Acting in a moral fashion? No need to fret about these things. We’ve looked into it in Colorado and dang if these things haven’t been optional all along. Hello state and local governments . . . round up those rascally debt problems and herd ‘em out west to us in Colorado, we’ll fix ‘em right good fer ya!
    (Visit for more info.)

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