Pride of place is about as universal a value as I have come across. People can make and take jokes about where they live or where they’re from, but when it comes down to it they see enough good that they will strongly defend the particular merits that make them love a place. Part of it is cognitive dissonance, of course – if I was unable to articulate any good reason to live where I do, or agreed with an out-of-towner that the merits of their locale vastly outweighed my own, I would probably leave, so I must have found some reason (imagined or not) to justify spending part of my all-too-short existence here.
It was particularly jarring, then, for me to hear my father say he wasn’t sure if he would live in or around Philadelphia again if he had the choice to do it all over. He was sufficiently fed up with the decades of impotence, waste, and incompetence that all the particular prides of this city had, in some ways, been washed away. I asked myself if I could see myself in the same place, if the dynamics I’ve seen in my own 8 years in the city repeated themselves for decades more, and came to the sobering realization that the answer was yes. I then thought about what could change to show the city is changing course, if there were issues our leaders could tackle to suggest they were serious about getting us back on track.
I immediately thought of DROP and the larger pension situation.
As such, this will be the first in what I hope to be a series of posts around understanding the pension picture in this city. Doubtless it will take some detours along the way. These aren’t new topics, and both DROP and the Philadelphia pension ecosystem have been written about with great style and insight by others. What I hope to do here is zoom out to take in examples and context from other places in the country to see what is common or unique about our situation, as well as to try to find accountability and direction rather than write another article that simply summarizes a bad situation getting worse.
And so, our story begins…in….
Magical Rhode Island!
It would be easy to start with Stockton, Detroit, Orange County, or other bankruptcies bought about by mismanagement and economic malaise. Or bring up everyone’s favorite bugaboo, *Illinois* (read in a spooky ghost voice). But why not start with a success story?
In 2011, the incoming State Treasurer of Rhode Island, Gina Raimondo, had made pension reform the centerpiece of her campaign. Funding ratios were hovering around 50%, and the aforementioned Illinois was the only state whose outlook was comparably awful. As with every other public pension I’ve come across, the unfunded liability was already understated due to outrageous (over 8%!) return expectations, but the usual suspects of low retirements ages, generous benefit awards, and politicians raiding the fund had contributed their bit. Treasurer Raimondo, a first-time politician with a background in venture capital, released a report enumerating the difficulties, calling out key contributing factors, and laying out a path to address the problem. The report was called Truth in Numbers and it’s worth a read: Truth in Numbers.
What would the report look like if we scratched out the numbers for Rhode Island and put in the numbers for Philadelphia? I wonder…
In any case, Treasurer Raimondo’s message grabbed the attention of citizens and politicians, particularly after the city of Central Falls, which had opted to run its government employee pension program independently, declared bankruptcy, its pension plan out of money. Galvanized, a reform plan passed through the state government and was signed by then-Governor Lincoln Chaffee in November 2011. Its five major action items were:
- Cost-of-living adjustments were suspended until funding ratios improved to 80%
- Moving to a hybrid defined benefit/defined contribution plan, wherein state employees would be required to put 5% of their salary in a new, TIAA-CREF-managed defined contribution program, with the state adding a further 1% of salaries
- Increasing the retirement age for full benefits to match Social Security thresholds
- Extending out the amortization rate of liabilities to 25 years from 19 years
- Establishing a commission to examine local (independent) municipal pensions to push for reforms there as well, such that the state would not be left holding the bag in the event of bankruptcies of other cities like Central Falls
Items 1 and 3 were the major drivers of cost savings, but it’s interesting to see where else the plan architects took action after a thorough examination of the topic and engaging with stakeholders on every side of the issue.
So here we are, some 7 years later. Has it worked? We see the headlines when states and municipalities reach points of crisis, but not so much as they work in incremental steps towards sustainable financial positions. I hoped to find this would be an unalloyed success, but the reality is more mixed.
First of all, I was amazed to find how long and hard some parties fought the reform bill. A critical underpinning to Rhode Island’s entire agenda is the fact that its pensions are governed by statute, rather than being contractual. This means that the state government could simply change the law, whereas contractual agreements on pensions are covered by state constitutions and therefore impossible to adjust. Attempting to find some legal ground to challenge this, however, union-related plaintiffs took the state to court. In 2015, when the state and plaintiffs finally reached a settlement, the New York Times ran a Dealbook piece discussing the bumpy road to success, comparing Rhode Island to (you guessed it) Illinois and Chicago. Even that wasn’t the end, however, and only in May of this year, almost 7 years after the reform bill was signed, did the state Supreme Court bring it all to an end by affirming the terms of the settlement.
Legally, then, the dust has settled, so we can have confidence the reforms will stay in place. So when we examine the 2017 financial report for the state pension plan (the latest available) we can have confidence that the funded ratio of around 53% is…
Wait, what?! The funding ratio was 48% in 2010. All the pain to get reform through and the funded ratio is only at 53%? It’s not as bad as it looks, actually, but it should still make you sit up and take notice. Remember my cheap shot above about unrealistic return expectations? One of Raimondo’s first actions as Treasurer was to lower the expected return to 7.5% from 8.25% – still lofty, but progress. At some point in the intervening period (I’m too lazy to determine exactly when, forgive me) the number came down again to 7.0%, so unfunded liabilities have (and I imagine will continue to have) a substantial tailwind in the form of falling return expectations.
What if we compare some of the line items from the Truth in Numbers report to see how the dire projections it foretold in the absence of pension reform fared? One of my favorite contrasts was the point that around 10 cents of every taxpayer dollar was going to fund pensions when the report was written, but that it would rise to 20 cents by 2018. Well, according to the state’s 2017 Comprehensive Annual Financial Report, it contributed around $246 million to its five pension funds that year. The Rhode Island Department of Revenue reported $3.68 billion of revenue for the same period. That’s 6.7% of taxpayer dollars going towards pension contributions. I have trouble determining if this is an apples-to-apples comparison regarding the original Truth in Numbers calculation, but it’s a reference point. (As an aside, it’s incredibly difficult to navigate and reconcile the varying budgets, revenue estimates, pensions reports, comprehensive annual reports, etc. to try and find clear, consistently defined data, but that’s a whole different topic.) How about a plain and simple comparison of contributions to the pension funds vs. benefit payments. In another case of the above, I can’t find the original source Truth in Numbers used to show the widening gap between contributions paid in and benefits paid out each fiscal year. As such, I went straight to the source – the ERSRI annual reports, specifically Table 1 in the 2017 report, which provide the past 10 years of data. Looking only at the state employees and teachers funds (which constitute the vast majority of assets) the gap has…not changed substantially, which I suppose could count as a victory given the fear of a difference that could have spiraled wildly out of control. The lack of transparency here is frustrating, not in that data isn’t available, but that the oodles of disclosures and reporting, combined with the particular math of pension obligations, make it hard to seize on a single number that can be used to show progress. My verdict – the pension reform was a win for sensible policy, and made gains for the state of Rhode Island, but not so much that they are clearly out of the woods. Stories about firefighters in Central Falls who saw pension benefits fall 50% hide the real story about a state taking positive action to right-size things for future generations. Only time will tell if it was enough.
Also worth noting, Treasurer Raimondo is now Governor Raimondo, running for re-election in 2018! If nothing else, I was pleased to see a candidate who can work hard to sell difficult, technical issues to the public rise to higher office and (I hope) keep making a positive impact.
So why did I start with Rhode Island? Not only because cutting straight to doom-and-gloom would be a serious downer, but because there are real similarities. Demographically, Rhode Island’s population is 1.1 million compared to Philadelphia’s 1.5 million. Both are older. Economically, both are former industrial areas trying to come back with a service-focused economy, but have a heavy union presence in the public sector. Politically, both are heavily Democratic.
Difference abound, of course, and the elephant in the room is that much of Rhode Island’s ability to maneuver came from its pensions being governed by statute, whereas Pennsylvania’s constitution contains the aforementioned protection of contract obligations. Philadelphia can impose reform on new employees, but benefits for those already employed are protected…unless they agree to give up some of those benefits, which is hard to imagine outside of municipal bankruptcy. So already the city has one hand tied behind its back. How did we get into this situation, anyway? Probably a good topic for the next post in the series!
smq.world 