October 24, 2014
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Fiscal warning from researcher puzzles mayor

Using a far more conservative rate of return on pension investments than adopted by the city and state, a senior research fellow with the Mercatus Center at George Mason University concludes that Warwick needs to dramatically increase annual pension contributions or face the financial problems facing other Rhode Island communities.

In an unsolicited email last week, Eileen Norcross takes issue with Mayor Scott Avedisian and Gov. Lincoln Chafee’s assurances that the city’s pension plans are in respectable shape. Consistently, the mayor has said that Fire and Police Pension 1, which according to last year’s actuarial study is 22.3 percent funded, represents a problem. However, he notes, the city recognized this 18 years ago when it adopted a 40-year plan to fund it. The city has not deviated from that funding schedule since. The three other major city pension plans, Fire II, Police II and Municipal Employees, are all funded at 70 percent of projected costs or higher.

After a preliminary review of Norcross’ argument, Avedisian said yesterday that he would take the word of the city actuaries, General Treasurer Gina Raimondo and Governor Chafee over Norcross any day.

After looking over a pie chart supposedly showing city expenses and pension liabilities that Norcross provided, Avedisian said, “None of her numbers seem to add up. We’re very confused looking at it.”

He pointed out that Norcross calculates city salary costs at $14 million, which is far below what it actually is.

Nonetheless, Norcross contends Warwick and a number of Rhode Island municipalities aren’t facing reality. It’s a message that has been long voiced by former Ward 1 Councilman Robert Cushman and, more recently, echoed by Ward 4 Councilman Joseph Solomon.

In particular, Norcross challenges the city projected 7.5 percent rate of return on investments, which she calls “unrealistic” and says it should be calculated at a “risk-free” 2.4 percent.

“By undervaluing their pension promises to workers and setting aside too little to fund them, Warwick’s government has put itself into a major financial hole,” she wrote.

Norcross said returns on government bonds and U.S. treasuries, which she called risk-free, should be used in making investment return assumptions. This would significantly reduce projected rates of return, thereby requiring the city to renege on pension benefits or have taxpayers make up the shortfall.

In an interview Tuesday, she said by assuming higher returns, the Warwick plans “take on more risk than private sector plans.” Yet, Norcross applauded state pension reforms achieved by General Treasurer Gina Raimondo, who she called “very impressive.” Norcross called Raimondo’s reforms “spot on.”

Warwick followed the state in assuming returns at 7.5 percent. It’s an action that increased the unfunded liability of city pensions and increased annual contributions, but one that Avedisian felt was necessary to more accurately reflect reality.

He questions why Norcross would use an assumption of 2.4 percent return when the state is using the higher 7.5 percent, and he’s not alone.

On the Internet, City Personnel Director Oscar Shelton found an article authored by the employee benefits firm that weighted the average actual investment return on pension assets for 100 of the largest defined benefit pension plans sponsored by U.S. public companies. For the 2011 fiscal year, the rate of return of the combined plans was 5.9 percent, as compared to a projected 7.8 percent.

Shelton goes on to question, if the largest companies are projecting 7.8 percent, how can Warwick be so far off at 7.5 percent?

Norcross says, for the city to fully fund its pension, it must triple its annual contributions to $51 million. If, on the other hand, it were to continue as it is now, the city faces a crisis in the next five to 10 years.

“I haven’t done the analysis, but the pressure is building,” she explained.

According to information on the web, Norcross is a lead researcher on the Mercatus Center's State and Local Policy Project, which has focused on “how societies sustain prosperity and the role civil society plays in supporting economic resiliency.” Her primary research interests include fiscal federalism and institutions, state and local governments, and economic development.

Norcross and fellow Mercatus Center scholar Jerry Brito are co-founders of the website, StimulusWatch.org.

Before joining the Mercatus Center, Norcross was the 2001-2002 Warren Brookes Fellow in Journalism at the Competitive Enterprise Institute in Washington, D.C. Norcross has also worked for KPMG as a consultant with their transfer pricing division and as a research analyst with Thompson Financial Securities Data.

Norcross said much of her research has been devoted to Rhode Island and New Jersey. She said Rhode Island is unique because of its size and the fact that many municipalities have one, if not multiple, pension plan and that is not the case in other states.

She said she has followed Gov. Chafee’s efforts to give cities and towns, especially those defined as “distressed,” the tools to restructure their pensions. Of those, she cited legislation enabling municipalities to suspend pension cost of living adjustments as being critical.

“They’re going to have to do something,” she said of municipalities.

Norcross did not seem to know that increases in some of the city’s pension plans are tied to wage increases won by active members of the plan, rather than a fixed COLA that compounds annually. In addition, increased benefits in the municipal plan are linked to the plan’s investment return.

Asked why she singled out Warwick to highlight, Norcross said it is one of several cities that her research has found to be in a precarious situation.

Avedisian said Norcross’ critique appears to “go totally against” all pension reforms at the state level.

“She never bothered to talk to us,” said Avedisian. “I put little stock in what she has to say.”

Raimondo could not be reached for comment.


Comments
5 comments on this item

The vast majority of these "Institues" and "Projects" are politically motivated and slant either left or right. The mere fact that shes was unaware and thus omitted the very important fact that COLA's in Warwick are non-compounding and are tied to the performance of the fund completely invalidates all of her figures and findings... Now, thats not to say I completely agree with the mayor or the states. However, with such flawed findings, you have to dismiss the poor crastmanship of this supposed professional. Shoddy work.

It states in the article, that for fiscal 2011 the combined rate of return for the 100 public companies in the Defined Benefit study referred to by Mr. Shelton, the rate of return was 5.9 %. Why wouldn't a more reasonable rate of return of 6 %/ 6.5 % be used rather than the projected 7.8 %/ 7.5 %? Based on the higher 7.5 % projection, isn't the Warwick Fire & Police I plan likely to be unfunded because the Plan isn't acheiving the desired/projected return?

I would like Mr. Shelton to answer, "Why isn't Warwick's projected return rate closer to 5.9 % rather than using a 7.5 % rate?If those individual companies' plans are unfunded further, it's not the taxpayers who will have make up the shortfall.

One may also anticipate the State of RI plan to have a larger unfunded pension(or at least one possible reason)balance if it doesn't acheive its desired/projected rate of return(7.5 %).

Actually, the COLAs are compounded because the salaries on which the benefits are based are not reset to the first (base) level each time the COLAs are applied. This means that COLAs are actually based partially on prior COLAs making them compounded. The difference between Warwick and other places is that the COLAs are tied to salary increases rather than a separate formula called a compounded COLA factor.

Here are the facts are COLA from Gabriel Roeder Smith & Company documents submitted to Oscar Shelton, Personnel Director on April 1, 2011 regarding the changes for new employees hired after June 30, 2012

Fire II Pension Fund: "Retirees currently receive a compounded increase of 3% per year, but for Tier II members, this would be reduced to 75% of the increase inthe Consumer Price Index, not less than 0% and not greater than 3%".

Police II Pension Fund: "Retirees currently receive a compounded increase of 3% per year, but for Tier II members, this would be reduced to 75% of the increase inthe Consumer Price Index, not less than 0% and not greater than 3%".

Municipal Pension Fund: "The proposal does not change either the 8.oo% member contribution rate or the mechanism for providing a COLA to retirees, based on "excess returns" that are banked."

http://mercatus.org/publication/rhode-islands-local-pension-debts

Her report on RI. Avedisian is playing politics...promises, promises. You can only get so much from taxpayers. City employees are going to get hit...and bad. Wake up and vote this clown out.

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