The RIP Map

Despite all the praise heaped on State Treasurer Gina Raimondo for temporarily freezing COLAs, nothing was done about the 7.5% assumed rate of return on Rhode Island’s pension fund assets, retirees double dipping with two state pensions, or those collecting disability while running 5k’s on weekends. Sure, more time may have been put up on the clock, but if the state were to get realistic about expected rates of return and use Treasury securities as a baseline, the unfunded liability is basically where it was before the reform. Not that it was her responsibility—it wasn’t—but the treasurer’s pension reform did nothing about the massive municipal pension debt in Rhode Island’s 39 cities and towns.

Time has already run out on bankrupt Central Falls, and now East Providence is in a form of receivership due to its pension mess. Central Falls receiver Judge Robert G. Flanders Jr. was forced to slash pensions by as much as 55% over the summer because there was no more money. I’m sure Governor Lincoln Chafee wasn’t thrilled about the negative press from Central Falls and how it reflects upon the state.

Last week a $2.6-million state bailout agreement was signed by Flanders and the director of the state’s Department of Revenue, Rosemary Booth Gallogly. With this agreement, the state is throwing 100 Central Falls retirees a lifeline that, get this, will potentially provide bigger pensions than they were getting before Flanders made the cuts. This is the epitome of the state playing the role of Big Brother. It’s my belief, though it’s only a hunch, that Flanders didn’t want to go along with this deal. It goes against what he’s been doing all along as one of the more vocal opponents to the outright fraud in Central Falls.

Pension abuse is not being dealt with by a bailout. The Providence Journal reports that “Among those who would get a pension bump is Robert J. Levine, a former Central Falls police officer who left the force on a disability pension after six years of service. The city also paid for his law degree. Today, he is a high-profile personal injury lawyer known as ‘The Heavy Hitter,’ who lives in a million-dollar house in East Greenwich. Just 43 years old, Levine would see his tax-free disability pension of $22,133 grow by several thousand dollars.”

On Monday, Moody’s Investor Services released a report on Rhode Island’s municipalities. It’s truly ugly. The report puts the state as the third most likely to fall into recession in the country. I’ve created a map outlining the pension situation for Rhode Island’s 39 cities—it could pass as the Greek Isles.

The Rhode Island Pensions (RIP) Map illustrates funding ratios per municipality. I use Treasuries as a realistic rate of return—backed by the full-faith-and-credit pledge of the U.S. government (for whatever that’s worth today). This approach matches up liabilities with promises known as a guaranteed rate of return. It’s what I would advise any investor do with a private-sector pension problem. Anyone suggesting otherwise would be laughed out of my office. Most local plans use an 8% rate, and yet the actual average five-year rate of return for them was only 1.97%, according to the Senate Municipal Pensions Study Committee Final Report, published on February 15, 2011, by the Rhode Island Senate Fiscal Office.

More cities and towns will be going the route of Central Falls when they come to grips with a depreciating real-estate tax base, higher borrowing costs resulting from Moody’s downgrades, and mountains of growing pension obligations. Rhode Island can only play lender of last resort for so long, until it’s going to need a bailout of its own.

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E.J. Smith - Your Survival Guy

Preparing your investments and family for when disaster strikes.

E.J. Smith is the Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH, where he completed course-work in Practical and Defensive Handgun, Conceal Carry Pistol, Shotguns, Precision Scope Rifle and Kidnapping Prevention. E.J. plays a Yamaha Recording Custom drum set with Zilldjian cymbals. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com. Sign up here to receive all the best content from Richardcyoung.com each week.