MuniLand

It’s getting a little tiresome to hear all the adulation that’s being heaped on Gina Raimondo, the Rhode Island General Treasurer. She’s been praised in the Wall Street Journal, Time, and now CNBC as some sort of fiscal Joan of Arc who rescued the state’s public pension system from insolvency. I’ll give Raimondo credit for leading the charge to reduce benefits to Rhode Island public workers and increasing their retirement age, but she’s far from a pioneer in making tweaks to state pension plans – 17 other states have also made changes recently.

More importantly, the problems Raimondo addressed were not the biggest that the state faced. The main problem with Rhode Island’s pension system is that it has very poor investment returns on its $6.5 billion portfolio of assets. Over the past ten years the state’s investments returned 2.47 percent compared with the national median of 3.4 percent (page 6). These returns are in the lowest tier of state pension plans, and this chronic underperformance is causing a substantial shortage of assets to pay retirees.

A national clearinghouse for public pension fund data, the Public Fund Survey, wrote in its report for FY2010:

Over time, investment earnings have a major effect on the cost and funding condition of a public pension plan: from 1982 through 2009, investment earnings accounted for 60 percent of all public pension revenue.

So the major source of pension plan funding, investment returns on plan assets, has been terrible in Rhode Island. I’m not aware of any discussion or changes in the law to address this issue. Instead, state workers and retirees are carrying the load of getting the pension plan in better shape. The latest pension reform only addressed state worker conditions. Check out this list from WPRI.com:

In her 2,500 word feature on the pension reform process in Rhode Island, New York Times reporter Mary Williams Walsh seems to have found more color than facts. The piece reads more like a campaign profile of Treasurer Gina Raimondo than an assessment of the gritty fight over public pensions in the nation’s sixth smallest state:

Ms. Raimondo also learned early on about economic forces at work in her state. When she was in sixth grade, the Bulova watch factory, where her father worked, shut its doors. He was forced to retire early, on a sharply reduced pension; he then juggled part-time jobs.

“You can’t let people think that something’s going to be there if it’s not,” Ms. Raimondo said in an interview in her office in the pillared Statehouse, atop a hill in Providence. No one should be blindsided, she said. If pensions are in trouble, it’s better to deliver the news and give people time to make other plans.

Pension reform sounds abstract and distant from everyday life. It is almost entirely confined to state- and local-government workers. Companies stopped giving pensions to their workers decades ago as they switched employees to 401(k)s and other voluntary-type retirement schemes. This removed enormous future liabilities from the balance sheets of companies and shifted the risk of adequate retirement means to individuals.

Public pensions plans are now  squarely in the sights of state legislatures. They are terribly underfunded and have grown unsustainable. Changes, though, must be made within the law. For example, states cannot categorically take away pensions because they are “contracted obligations.” But states can and are chipping around the edges and making changes to things like “cost of living adjustments” (COLA) and the required retirement age.

These legislative modifications are being challenged in courts. This is not surprising since people don’t generally give up their benefits or rights on a voluntary basis. In many cases these pensions are the only thing that retirees will have to fund their retirement. Workers are not winning their court cases, though. The WSJ reports that: