Almonte: Cranston No Model for Pension Funding

The Auditor General, Ernest Almonte, has an opinion piece in today’s Projo that corrects Ed Achorn’s baseless praise for Cranston’s pension funding. Of particular note:

Ironically, Mr. Achorn mentions Cranston as a community that has seemingly “staved off — temporarily, anyway — ” a pension disaster. In fact, Cranston is quite representative of the problem throughout the state. One could fairly conclude that Cranston’s police and fire pension, administered by the city, is in crisis.

In 2005, Cranston’s unfunded liability grew by more than $5 million, to $220.5 million — even after I had insisted that the city make the required contribution for fiscal year 2004. Unfortunately, in fiscal year 2005 the city failed to make the required contribution; its payment was short by more than $2 million.

Cranston reported an operating surplus for fiscal year 2005 of $3.5 million. Reporting a $3.5 million “surplus” could be considered misleading. This surplus could have been applied to the pension debt. Cranston based its contribution on an unrealistic 8-percent rate of return; it actually earned less than 4 percent. I hardly think Cranston should be held up as an example for other municipalities to emulate.

So our outgoing Mayor, Senator-wanna-be, sent a letter with the tax bills bragging about how pension assets are “Nearly $40 million! Continually funded,” when in fact the city did not make the required contribution for 2005.

Furthermore, the financial firm responsible for investing our funds, UBS Financial, is only producing a 4% return. Currently, a 4% return has become standard on many savings accounts, with some banks like Capital One offering rates as high as 4.75%. So the city could end its contract with UBS (a contract, which, if I remember Peter T. Pastore’s words correctly at the meeting to seal this deal, is “at will” and can be terminated at any time) and put the money in a savings account and make the same return or more without paying a financial firm one single dime. Or better yet, the city could invest in US savings bonds and make an average return closer to 5%, free of risk. Particularly now, as the stock market is looking shaky, US savings bonds or a savings account might be a prudent move.


8 thoughts on “Almonte: Cranston No Model for Pension Funding

  1. Wasn’t this one of the “Warning Signs” on the letter he inserted into the sewer bill?

    And people don’t believe that it was never about Cranston.

  2. The largest gap is actually at the state level and translates into an enormous hole to be paid from our state income and property taxes for underfunded pension debts not previously paid. It’s the hot potato no so-called leader is willing to address…. yet.

    I don’t hate the players (“labor”), I do hate the game of mis- and underrepresentation of the enormity of this burden…..

  3. To be clear, it would seem like potentially a good idea to put the money in savings or short-term bonds while searching for a new financial firm. I would argue that any firm handling the city’s pensions should be able to make at least a 7% average return (average of 5 years, for ex.) That is a low expectable average for long-term stock market investing.

    UBS Financial is weighed down by an 80 million dollar settlement they had to pay to the US Govt. to get out of trouble in the Worldcom collapse investigation, and they probably have more issues like this that I don’t know about.

    Cranston could do better. Furthermore, we could be investing with a firm that is locally based, or at least has a large division of its business in Rhode Island, such as Fidelity or BOFA. The more we can keep money local, the better.

  4. Funds flow from the local adffiliate to whatever HQ the investment house is located.

    To a point you’re corect that given the fund size under management, a higher return that protects principal is viable AFTER management fees.

    As was the case in Orange County, CA, a portfolio that holds too much stocks can experience a degree of volatility that most risk adverse investors may be unwilling to ride.

    The 80 year long-term return of large public stocks are almost 11% and half that for government backed instruments, so your comments have merit.

    btw $80 million for UBS is chump change….

  5. Hello,

    Laffey’s letter to the City with the tax bill was just strange. Skulls and crossbones? Is he running for pirate?

  6. Yeah, but in keeping with his peculiar ways. I actually thought that little list was a good idea, but then to read that we are not adequately funding our pension, geez, so you’re not even heeding your own warnings. What does that say?

    Also, Carl, yes I realize $80 million is a drop in the bucket, but I see it as emblematic of larger problems for the firm and an indicator that they are swayed by corrupt tactics in their investing decisions, which along with being unethical is, in my opinion, bad for long-term business.

    Cranston could also consider contracting with a socially responsible investing firm such as Calvart. They would have a reason to work extra hard to get that higher return, as they would want to prove themselves able to do well with municipal pension accounts in order to attract others.

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