Fri, 29 Jun 2007

More about DOT

A column (by me) about DOT appeared in today's Woonsocket Call and Pawtucket Times. Let those papers know what you think.

15:11 - 29 Jun 2007 [/y7/jn]

Thu, 28 Jun 2007

RIPTA!

A new report is out from the Sierra Club about sensible ways to improve our bus system. The first thing we have to do isn't offer more money, but to find a way to stop making things worse. (The second thing to do is to provide it more money.)

You can also find it at www.ri.sierraclub.org/Here to There.pdf.

The report is filled with rare insight and wit, invaluable policy suggestions and surprising critiques. It contains a breadth of vision unmatched by any similar effort, and will be a document of astonishing value to policymakers in our state for years to come. Did I mention who wrote it?

16:28 - 28 Jun 2007 [/y7/jn]

Fri, 15 Jun 2007

DOT

While I'm gratified to see coverage of the fiscal disaster of DOT in the news, the troubling part is that the Journal seems not to want to ask why there are so many contractors at DOT and why they lack people qualified to do bridge inspections, for example. As has been covered in our pages extensively, DOT has been irresponsibly borrowing for years. Roughly it goes like this:

1. DOT has to match federal funds 80/20 or 90/10 in order to receive them.
2. The state routinely borrows to make that match, $30-40 million every year, no matter what.
3. DOT used to borrow for employee salaries (!) but were told ten years ago to stop. But they weren't given the money they needed to both stop the practice and keep building roads. So they didn't.
4. Contractors, you see, can be allocated to individual construction projects, and therefore are considered construction costs, not personnel costs. Same amount of money, just in a different accounting category.
5. So many personnel were laid off and rehired as contractors. Presto! No salaries are being paid with debt, but lots of contractors are being paid that way.

Remember, you heard it here first. Actually, if you were a subscriber, you read it here two-and-a-half years ago. We even wrote a bit about it in issue 1, in May 2003.

Of course, there's nothing really remarkable about that. James Capaldi, who retired as the DOT director a few months ago, and Ed Parker, who was put on administrative leave yesterday explained it all to me in 1998, in a meeting in Capaldi's office. (He wasn't director yet.) In other words, this story has been available and obvious for years.

Maybe you should subscribe?

15:46 - 15 Jun 2007 [/y7/jn]

New column

The Woonsocket Call has invited me to contribute a regular column to their fine journal. Find the first edition here.

09:39 - 15 Jun 2007 [/y7/jn]

It's starting again

For evidence that the insane press coverage of John Kerry in 2004, Al Gore in 2000 and Bill Clinton had little or nothing to do with those candidates' personal qualities, read here.

08:42 - 15 Jun 2007 [/y7/jn]

Thu, 14 Jun 2007

Restart the pension clock

A proposal has surfaced in the legislature (with some help from the RIPR editorial staff) to re-amortize the state pension fund's unfunded liability in order to avoid cuts to education in cities and towns around the state. The proposal may manifest itself in a floor amendment during the budget debate this coming Friday. This issue is covered extensively in issue 9, but here's a short summation of the situation, and a FAQ list.

First, a definition: The "unfunded liability" of a pension system is the difference between what we expect our pension fund will grow to, given reasonable assumptions about our investments, and what our pension obligations will grow to, given reasonable assumptions about our employees and the rate at which they retire.

Rhode Island is currently on year 7 of a 30-year program to retire the unfunded liability of our public employee pension system. The proposal is to restart the clock at 30 years, pushing back the final date from 2029 to 2037.

That's all, but it will save the state and cities and towns more than $35 million this year.

Find the FAQ list after the jump.

Q: Shouldn't we pay back the unfunded liability?

A: We should, but how fast? Public pension systems can operate fine for decades without being "fully funded." Other systems have a substantial unfunded liability, but have no plan to pay it off at all. Colorado's public pension plan is "underfunded," and current predictions are that it will achieve full funding in 2041, but they are not on an aggressive program to repay it as we are. Rather, they expect employee attrition to do the trick over the next 34 years. New Jersey has a $24 billion unfunded liability in their system, and no current plan at all to repay it. But checks still get sent to retirees, who cash them and live off them. The state of Illinois is currently on a 50-year schedule that will only get them to a 90% funding level (see IL Public Acts 88-593 and 94-0004). The Chicago Teachers' Pension Fund uses a 40-year schedule, as opposed to our 30 years.

Q: Isn't resetting the clock an extraordinary measure?

A: No. Actuaries routinely suggest that public pensions that are in the proces of amortizing their liabilities re-amortize their liabilities when the clock gets down around 20 years. Some pension systems re-amortize every year, so that every year is the first year of 30. This is called an "open" amortization schedule. The state of Iowa uses this method in some of their pension funds. This method still makes progress on the unfunded liability, but at a somewhat slower pace than a "closed" system with a fixed end date. Rhode Island uses a closed system.

Q: Won't this hurt the state's bond rating?

A: The only people who know that work at Moody's, S&P or Fitch, the bond rating agencies. But this is a minor change, and we're doing fine in many other respects. In a referendum that passed last fall, we increased the size of our "rainy day fund" and enacted budgetary restrictions that will force our state to devote more funds to repaying bonds. These were all measures designed to make our bonds more attractive to the bond rating agencies.

Here's a press release from Fitch's (September 8, 2006), from before the referendum passed:

Rhode Island's 'AA' GO bond rating reflects a history of responsible action to protect its debt and financial position. The state's economy has grown and diversified away from manufacturing, making it less vulnerable to economic cyclicality, although growth has lagged in the recovery. Reserves continue to be fully funded at the statutory maximum of 3% of revenues. Debt levels are well below historical highs.

In other words, we're doing fine in the eyes of the bond rating agencies. Since what's being proposed here is not at all out of the ordinary, there is no reason to expect a negative hit on our bond rating.

Q: Isn't this a knock on state employees?

A: Amortizing our liability has nothing at all to do with the pension obligations we have to our retired employees. A fully funded pension system is, according to most accountants, the easiest way to fulfill those obligations, but it is not the only way. If we re-amortize our liability, our retirees will still get their checks, and banks will still honor them. Fully funding the pension system should be done out of consideration to future taxpayers who have to pay those pension obligations, but is irrelevant to the future retirees.

Q: Didn't we get in trouble doing this once before?

A: No. In the fiscal crisis of the early 1990's, under Governor Sundlun, the state underpaid the pension fund and this is part of what created the underfunded situation we have today. But pension fund payments are made up of two parts: the payment of this year's expenses, and a payment toward the unfunded liability. The underpayment in the early 1990's shorted the payment of the current expenses. Re-amortizing is about using a different schedule to pay down the unfunded liability.

Q: Aren't we already borrowing too much?

A: There is no borrowing at all involved in the proposal. The arithmetic involved looks like the kinds of calculations you make to figure the interest on loans, but it's a family similarity only.

Q: Isn't this just a one-time thing?

A: No. This will lower the payments this year and next year and the year after. It will not lower the payments a lot. The state is currently planning to pay over $244 million in pension payments, the vast bulk of which is going toward the unfunded liability. The cities and towns are collectively paying over $110 million. Under this proposal to lower the payments, the state will pay $221 million, and the towns will pay $97 million, most of which is still to be applied to the unfunded liability. This is a proposal to take a slightly more relaxed pace towards the same goal, not a proposal to abandon the goal.

15:41 - 14 Jun 2007 [/y7/jn]

Another market failure

Do you know why photo-voltaic cells still cost a lot? Here's one reason.

15:41 - 14 Jun 2007 [/y7/jn]

Wed, 13 Jun 2007

America's Progressive Majority?

Read.

10:47 - 13 Jun 2007 [/y7/jn]

Keeping us safe

Who knew that this was how the military would keep us safe? As one commenter put it: "The good news is that we've found plenty of WMD. The bad news is the weapons are ours and we found them dumped in the sea."

09:00 - 13 Jun 2007 [/y7/jn]

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