CPC Study Documents How Rhode Island Implemented Pension Reform

FOR IMMEDIATE RELEASE
Sacramento, California, January 28, 2013
Contact:  press@calpolicycenter.org

The California Policy Center has just published a new study that provides an in-depth chronology of Rhode Island’s pension reform efforts. Despite several incremental pension reforms passed by their state legislature starting in 2005, by 2010 Rhode Island’s state pension plan was only 48% funded, and faced imminent collapse. In late 2010, awareness of the need to save the state’s pensions intensified in the wake of the bankruptcy of Central Falls, and the court ruling that reduced that city’s existing retiree pension benefits by 50%.

Incoming state treasurer Gina Raimondo, a Democrat, had just convinced Rhode Island’s state Pension Board to reduce the assumed rate of return to more accurately reflect recent performance, which further increased the level of underfunding. She then published a 14-page report to the people of Rhode Island titled “Truth in Numbers, The Security and Sustainability of Rhode Island’s Retirement System” in June. Her purpose was “to lay out the main reasons for the state’s pension challenges, explain the implications for all Rhode Islanders, and offer a framework for devising solutions.”

In “Truth in Numbers” Raimondo wrote that before specific proposals for change are developed broad agreement must first develop among stakeholders about what the problem is, how it developed, and what reform must accomplish. She identified these key requirements of reform: accurate and transparent assumptions, equitable and reasonable changes in pensions, intergenerational fairness, comprehensive and self-correcting processes, and a realization that unfunded liability for past service must be reduced because it’s the lion’s share of the problem. This report played a key role in making it possible for reform proposals to gain broad support and be adopted.

As described in the study, the solutions ultimately embraced by Rhode Islanders included several bold and creative steps, such as tying COLA’s to the fund’s rolling five year average rate of return, and putting a cap on the amount of pension that is eligible for COLA adjustments. The solutions also include a cap on the percent of salary that may be used to calculate a pension benefit upon retirement, an increase to the minimum retirement age, and a hybrid benefit that retains the defined benefit but also adds a defined contribution component. Rhode Island today hasn’t completely eliminated the challenges they face funding their state pensions, but these changes are substantial and provide an example for other states and cities to follow.

The author of this study, John Dickerson, a financial professional living in Mendocino County who is involved in public sector pension analysis and reform, had this to say about Raimondo’s efforts, “what Raimondo accomplished in her first year in office is astonishing. Her leadership and reform is a model for other states; not only in terms of how to share difficult financial sacrifices by all parties both in order to save the pension system and sustain public services, but politically how Raimondo made this a nonpartisan issue and built an overwhelming reform coalition in her State that could not be denied.”

To read the entire study, go to “Gina Raimondo’s Shining Example – Pension Reform in Rhode Island,” or download a printable version.

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The California Policy Center is a non-partisan public policy think tank that aspires to provide information that will elevate and enlighten the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at www.CaliforniaPolicyCenter.org.

CPC Study Consolidates California's State and Local Government Spending

FOR IMMEDIATE RELEASE
Sacramento, California, January 14, 2013
Contact:  press@calpolicycenter.org

When Sacramento politicians are dancing in the end zone about their “balanced budget,” how much does that tell us about whether government spending has been brought under control? Not much, according to a new study by the California Policy Center. Using the most recent financial data available, the CPC study calculates that direct State government spending for FYE 6-30-2011 ($49 billion) is dwarfed by total spending for that same year by local governments and agencies ($316 billion).

According to Bill Fletcher, co-author of the study, “we can’t understand the state’s financial situation without looking at total spending. In addition, we need to look at balance sheet items, mainly total debts and unfunded liabilities. The cost of servicing these debts will increase substantially over time as today’s low interest rates return to normal and claim an increasing share of the state and local budgets. The first step in dealing with these financial challenges is to recognize their magnitude using realistic assumptions to accurately estimate their present and future costs”

The conclusion of this study, based not only on an extensive review of publicly available data but also on many interviews with financial professionals within state and local government agencies, is that (1) California’s total state and local government debt and annual spending is higher than is generally understood, (2) government financial statements are fragmented, frequently unaudited, and use obsolete financial accounting standards, (3) policymakers are not getting adequate information, and (4) the most serious financial problems are at the local level.

“Politicians can hide a lot of mistakes behind this disparity,” said Ed Ring, Executive Director of the CPPC and co-author of the study. “It is natural for the media and the public to be most interested in what is going on in Sacramento. But it is not uncommon for Sacramento to avoid a budget problem by sending the spending obligation to local governments with hidden costs that are not adequately paid for by revenues provided by the State.”

Recommendations include:

(1) All local government financial statements should be audited and submitted to the state controller under deadlines that permit consolidated data to be available to the public within 12 months after a fiscal year end.

(2) California’s state and local governments should proactively adopt new GASB standards that require recognition of unfunded pension and health care obligations as long-term debt.

(3) Either the California Controller’s office or the California Dept. of Finance should compile reports that consolidate and clearly communicate the total state and local government spending, deficits, and outstanding debt.

(4) The state legislature should mandate all state and local government organizations begin pre-funding all retirement commitments, including retirement health care.

(5) To better ensure that budgets aren’t unexpectedly consumed by dramatic and unexpected increases to annual funding obligations for retirement benefits, the state legislature should require more conservative investment return assumptions to be adopted, especially by the pension funds.

To read the entire study, click on “How Big Are California’s State and Local Governments Combined?

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The California Policy Center is a non-partisan public policy think tank that aspires to provide information that will elevate and enlighten the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at www.CaliforniaPolicyCenter.org.

CPC Study Calculates Impact of New Credit Rating Criteria

FOR IMMEDIATE RELEASE
Sacramento, California, January 14, 2013
Contact:  press@calpolicycenter.org

The California Policy Center has just published a new study that examines the impact of the credit rating criteria being considered by Moody’s Investor Services for state and local governments. Moody’s has proposed discounting pension fund liabilities at a rate of 5.5% instead of the official 7.5% rate commonly used by pension fund actuaries. Moody’s has also proposed shortening the amount of time that most pension funds would allocate to “catch up” their asset balances to become 100% fully funded.

This study, authored by John Dickerson, a financial professional living in Mendocino County who is involved in public sector pension analysis and reform, calculated the impact of these changes on the required annual contributions to pension funds. Dickerson focused on analyzing the independent pension funds of six California counties, Alameda, Contra Costa, Marin, Mendocino, San Mateo, and Sonoma. The results were striking.

In order to satisfy Moody’s definition of prudent financial management, Dickerson calculated that each of them would have to more than double their annual pension fund contributions. The amount of money the six counties combined would have to contribute each year to their pension funds would climb to over $1.6 billion, an amount equivalent to 100% of the property tax revenues utilized by these counties.

“Although my focus is County Pension Funds I expect an evaluation of other government pension funds in California, including CalPERS and CalSTRS, would yield similar results,” said Dickerson. “Pension funds need to take a very hard look at whether or not assuming a 7.5% return on investment in the next decade is prudent, They also need to confront the unfairness and additional cost of pushing this generation’s unfunded pensions off to the next generation to pay. They face some very difficult adjustments.”

To read the entire study, go to “The Impact of Moody’s Proposed Changes in Analyzing Government Pension Data,” or download a printable version.

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The California Policy Center is a non-partisan public policy think tank that aspires to provide information that will elevate and enlighten the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at www.CaliforniaPolicyCenter.org.