Rhode Island’s pension problems are back in the headlines with Providence Mayor Jorge O. Elorza’s proposal to issue a pension obligation bond for approximately $700 million to help close the gap on a $1.2 billion unfunded liability. Statewide independent state municipal plans have an unfunded liability of $2.8 billion, according to the latest report from General Treasurer Seth Magaziner. That’s an increase in liability of $300 million in just one year – a time period in which the stock market went up over 15%. The increasing payments to these pension funds are gradually eating municipal budgets alive – driving a spiral of decreasing services and increasing taxes that is unsustainable.
But why does Rhode Island have 34 independent plans in the first place? Many large (and small) states centralize the management of municipal pension assets into a single state managed system, and for good reason. Combined management at the state level provides numerous advantages: lower costs, higher returns, risk mitigation and the avoidance of conflicts of interest are just a few.
Anyone with a retirement account has been told don’t have multiple retirement accounts when you change jobs; merge them into one. It is a prudent step to take so that you don’t pay unnecessary fees on multiple plans. It’s also more difficult to properly diversify and balance your portfolio when you are working across multiple accounts. Our independent pension plans are paying adviser fees to several different companies for mostly the same advice. And the professionalism and value of this guidance varies greatly. Does East Providence have the resources to evaluate who should provide insight on properly managing $100 million?
Having served as an investment commissioner for the city of Providence, I can tell you these underfunded independent plans are too heavily invested in equities. Much like a gambler down on their luck, they’re making ever larger bets in the market trying to get back to even and close the unfunded liability gap. If all the state’s various pension assets were managed centrally, we would have a more-balanced risk portfolio and eliminate many of the dramatic swings in pension values.
Why does Rhode Island have 34 independent plans in the first place?
Finally, we’ve all lived through a variety of scandals here in Rhode Island when there were potential conflicts of interest. We don’t want independent plans being managed by poor-caliber financial advisers who happen to “know a guy.” The state is managing roughly $10 billion in assets already – bringing in the additional municipal plans will cost nothing additional to manage. The state engages high-quality investment vehicles and has a staff of professional, experienced managers.
There are plenty of reasons that a pension obligation bond for Providence makes sense, but the devil will be in the details, as is the case with most financial products. However, as part of the authorization process, let us take the opportunity to move the municipal plans into centrally managed state hands. The General Assembly should require Providence to move the assets into the state plan as a condition to authorizing a bond. A centralization requirement should be a standard for a municipal plan seeking to engage in any pension-related borrowing above statutory limits. Let’s put pension debts behind us once and for all and stop gambling with our collective future.
Mark Tracy is a former Providence resident and served on the Providence Board of Investment Commissioners. He now lives in Barrington.
I’m glad Mark moved to Barrington.