Recently, I had occasion to visit the Coastal Resources Management Council (CRMC) office. It was a treat. From Amanda at the front desk to Greg B., the specialist who assisted me with my application, I was again reminded of the professionalism, courtesy, and expertise of the overwhelming majority of state workers who do a great job. My meeting happened to follow the news that Rhode Island lost some $466 million of their pension funds because of investment decisions. These workers have taken it in the neck as a result of sacrifices imposed on them to ‘save” the pension but yet they have to stand by and see the money fritter away. The State Investment Committee needs to get on the dime, stop the excuses, and invest wisely.

Recently, the Economist magazine reported that a pension finance task force report into the way that public pension funds are run is being shelved. This study was done by the American Academy of Actuaries and the Society of Actuaries. The Economist got to see the draft report which excoriated the approach to valuing American public pensions. The big costs for pension plans lie in the future when the recipients retire and benefits are paid. These costs are discounted at some rate to the present day so that the treasurer’s office knows how much money to set aside.
Rhode Island, like many other states, uses a discount rate of 7.5 percent based on projected earnings—and therein lays the rub. The report says that this approach is deeply flawed. Indeed, accounting rules do NOT allow corporate pension plans to use it. Economic principles suggest that the cost of a benefit doesn’t depend on the assets expected to finance it. (Economist, August 13, 2016, p.55). The bond rate is the more appropriate gauge.

The dismal performance in 2016 evidences the Pollyanna projection by the state. Politicians use the rosier 7.5 percent since they don’t want to upset taxpayers while they are in office. The reality, however, is that when the bill comes due, future taxpayers will be hit by a locomotive.

In Rhode Island the very essence of pension reform was on the backs of the recipients. Certainly, too-rich promises made to the unions by past politicians were a major reason why the public had little sympathy for pensioners present and future. Most of that fat has been trimmed away. Unless, however, the state is serious about preserving the pensions by prudent investment than the future recipients are going to have a rude awakening. While it may be easy for some to beat up on public employees the fact is that we did make a promise to them. Just like anyone would be outraged if his employee gypped them out of a pension the taxpayers have a responsibility not to welsh.

Present politicians need to come clean by using an appropriate discount rate and to plan what has to be the public share along with a plan on how to get there. It is dishonest for Providence whose pension plan is crippled and for the state to ignore the upcoming tsunami of funds needed to stabilize the respective pension funds. And while they are at it how about some greater analysis of investments and their costs.

Arlene Violet is an attorney and former Rhode Island Attorney General.