RI’s unfunded pension liability soars by nearly $2B

That’s the big headline out of the long-awaited experience study on the state pension system being released this morning.

After changing the assumptions driving the numbers – most notably, by reducing the expected investment return rate from 8.25% to 7.5% – the state’s consultants have delivered Treasurer Gina Raimondo and the Retirement Board a revised estimate of the unfunded liability for state employee and teacher pensions: $6.8 billion as of June 30, 2010.

That’s up from $4.9 billion when they ran the numbers as of June 30, 2009, an increase of $1.9 billion, or almost 39%. The pension system’s “funded ratio” – its assets to its liabilities – fell to 48% from around 58%.

That would make Rhode Island’s pension gap the largest in the country, at least according to a recent study by The Fiscal Times and Boston College’s Center for Retirement Research.

The upshot? The employer contribution to the pension fund needed from taxpayers in 2012-13 will rise from $465 million to $622 million, an increase of $157 million. Some of that cost is picked up by local governments. It doesn’t include the contributions that come out of workers’ paychecks.

Will the Retirement Board vote to accept these numbers – and all the dominoes that will fall if they do? We’ll find out at this morning’s meeting, which starts at 9 a.m.

Update: The board is being asked to reduce Rhode Island’s expected future investment return rate from 8.25% to 7.5%. That matters because a lower future return forces larger cash contributions to the pension fund now, since it assumes the fund’s endowment won’t grow as quickly in the capital markets to make up the difference between promised benefits and assets on hand.

Switching to 7.5% would give Rhode Island one of the lowest expected return rates of any state pension fund in the country. Only seven states – none in the Northeast – assume a 7.5% future return; two others, the Carolinas, assume a 7.25%. Nobody goes lower than that.

Here’s a chart from the Pew Center on the States showing the rate used by each state:

Update #2: The actuaries just put up a chart showing that a growing number of big pension systems have already lowered their expected rates of return. They had some of them down to 7.00% as of last month. I don’t have it digitally, so you’ll have to take my word for it.

Also, the Rhode Island League of Cities and Towns’ Dan Beardsley, a longtime Retirement Board member, is defending the board’s decision to approve the 8.25% return rate back in the late 1990s. He referred to unnamed “critics,” a likely reference to former Treasurer Nancy Mayer’s recent comments to Kathy Gregg in the Projo.

Update #3: This one chart should explain why this morning’s meeting matters – we’re talking about a one-year surge in state taxpayers’ annual pension contribution of $164 million, from $233 million to $397 million.

Update #4: The Retirement Board approved the new higher estimates by a 9-6 vote. Treasurer Raimondo says she will issue a report outlining the problem with the pension fund sometime in the next few weeks, and will follow up with a second report presenting possible solutions for the General Assembly to consider.

6 thoughts on “RI’s unfunded pension liability soars by nearly $2B

  1. This is still based on a fantasy return rate of 7.25% plus it does not take into account that the pension fund books future savings estimates as savings today.

    BTW Ted have you seen this yet?


    We’re giving a $75 million dollar loan to a game company with no product where $20 million will be used to make payments on the loan because they have no income but we won’t bend over backwards to bringing in GE Capital?

    This state has to start looking at dropping all taxes to bring in big business. We could be like South Dakota is with banks but we are short sighted and it’ll never happen.

    GE Capital would have brought a lot of business to the state and would have other business looking to relocate to consider RI.

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