Rhode Island Pension Board Widens Funding Gap 27% by Lowering Return Rate
Rhode Island’s unfunded public pension liabilities jumped about 27 percent after the board overseeing the retirement system voted to cut the presumed rate of return on assets.
The fund lacks at least $6.83 billion to meet projected needs, up from about $5.4 billion before overseers yesterday cut return expectations to 7.5 percent a year from 8.25 percent, according to a report from Gabriel Roeder Smith & Co., consultants hired by the board. The system, with $7.4 billion in assets as of April 1, covers more than 50,000 people.
“It’s a big deal,” said Treasurer Gina Raimondo, a Democrat who heads the Employees’ Retirement System of Rhode Island board and voted for the change. “I believe it was the right thing to do.”
The move may drive taxpayers’ fiscal 2013 obligation to the system up 33 percent, to $622 million, from earlier projections, according to the Irving, Texas-based consultants. The pension’s funding ratio, or assets as a proportion of assumed liabilities, fell to about 48 percent from 54 percent. Actuaries say the level must be at least 80 percent to ensure adequate coverage.
The system’s “current real rate-of-return assumption is not justified by asset allocation and forward-looking expected returns by asset class,” the consultants said in the report, which recommended cutting the projections. The nominal rate adopted yesterday includes 5.15 percent on invested assets and 2.75 percent for inflation, minus 0.4 percent in expenses.
Joining Other States
Rhode Island joins states from New Jersey to California and Illinois that face unfunded pension liabilities estimated to be as much as $3.6 trillion, when city plans are included. The Ocean State was ranked sixth-worst, based on assets as of Aug. 20, in data compiled by Bloomberg. Based on information from fiscal 2009, its pension’s funding ratio was about 61 percent.
The U.S. Securities and Exchange Commission is probing Rhode Island bond offerings, possibly over disclosure of the state’s pension liabilities, Raimondo said in February, when the investigation was made public. The state included information about pensions in statements connected with securities sales.
Raimondo is preparing to release a report next month that will outline ways to close the pension funding gap, according to Joy Fox, a spokeswoman. Former Governor Donald Carcieri, whose second term ended in January, tried reining in costs by raising the retirement age and years of service needed to qualify for a stipend, capping benefits and altering cost-of-living increases, said Gary Sasse, the Republican’s head of administration.
‘Fiscally Unstable’
“Those reforms could not belie the fact that the system is fiscally unstable,” Sasse said in a telephone interview. “The system is just not affordable or sustainable without a reduction in benefits.”
Governor Lincoln Chafee, a former Republican U.S. senator who was elected last year as an independent, declined comment through Michael Trainor, a spokesman. Rhode Island faces a $331 million deficit in fiscal 2012, which represents 11.3 percent of its current annual spending, according to a March report from the Center on Budget and Policy Priorities in Washington. The state’s fiscal year begins July 1.
The higher pension liability doesn’t necessarily threaten the state’s credit rating, said Marcia Van Wagner, a Moody’s Investors Service analyst in New York. She said Rhode Island has been making its annual pension contributions, unlike some states that have deferred payments amid fiscal stress.
“We try to look at this in a balanced way that takes into account the state’s willingness to address its obligations as well as balance its obligations against other requirements in its budget,” Van Wagner said.
Rhode Island general-obligation debt is rated third-highest by Moody’s, at Aa2, and Standard & Poor’s, at AA. S&P has a negative outlook on the credit.
To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.
To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net
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