Riley: Market Crash Puts Providence & RI in Immediate Peril
Tuesday, February 06, 2018
Just one week ago the State Treasurer and Providence’s investment adviser were crowing about their returns. Three days later over one trillion in market capitalization was wiped out.
The cause for the decline is of no concern to the average citizen but the massive decline is very worrisome.
The Dow Jones Average lost 1176 points, a single day record, and that was after Friday’s down 666 points. Pension fund managers at both the state level and city level had 18 months of perfect markets with very low volatility. Providence made approximately 12.3% in the calendar year 2017 and 3.4% on top of that in January 2018. The State of Rhode Island made 14.4% in 2017 and was up an estimated 4% in January 2018.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe extraordinary January 2018 gains were wiped out in 3 days and now both pension funds will have to reacquaint themselves with the ominous reality of pathetically underfunded pension plans.
The State of Rhode Island is funded at 53% which is worse than when Governor Raimondo imposed dramatic reforms. The City of Providence is funded at 25.8%, the worst funding ratio of any large city in America. There are fewer assets now in the Providence pension fund than there were in 2006.
The last nine years the market has rallied 300% yet because Providence has purposely underestimated liabilities and purposely overstated assets, the fund is now in much worse shape. Purposely overstating assets and understating liability allows the mayor to hold back contributions to the pension plan and spend it on other things.
Over the last week, the State has lost (by my estimate) approximately $650 million and Providence has lost $25 million of its woefully low $325 million in assets. Both the State and the City need to ramp up pension contributions dramatically to keep the plans solvent. That money will necessarily come from taxpayers.
Pension Obligation Bonds?
Chicago made headlines recently when the Illinois State Universities Annuitants Association urged Illinois to issue $107 billion in bonds to pay off shortfalls in the state’s five leading pension funds. The proposal would bring the 5 Illinois funds to approximately 90% funded.
Providence would need approximately $1.3 billion to achieve 90% funded using a 7% discount rate. The State of Rhode Island would need $3.3 billion in state taxpayer-backed pension obligation bonds. Had the Governor and Mayor contributed more to pension plans, the liability the state taxpayers would be far less.
At what point do we hold politicians responsible for under-contributing to obligation like pension plans in order to cover up operating inefficiencies like UHIP, DCYF, DOT, etc? In reality, the state taxpayer will have to pay for Providence as well and neither Governor Raimondo or Mayor Elorza will even bother to comment or tell us their plans. Shameful.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
Related Slideshow: GoLocal: Benchmark Poll, October 2017
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