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.

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