Rhode Island's Local Pension Debts

16 Pages Posted: 6 Sep 2018  

Eileen Norcross

George Mason University - Mercatus Center

Benjamin J. VanMetre

Mercatus Center, George Mason University

Date Written: November 2011

Abstract

Rhode Island’s state and municipal pension systems face large and growing unfunded pension liabilities. The governor and state treasurer have identified pension reform as a key to stabilizing the state’s finances and also to ensuring a sustainable retirement fund for Rhode Island’s public employees. According to government estimates, the unfunded liability for municipal plans and state plans totals $9.3 billion. These figures are calculated under assumed discount rates based on the expected return on pension asset investments. However, according to economic theory, pension liabilities should be valued based on their relative risk and thus the return on Treasury Bonds is currently the appropriate discount rate to use when valuing liabilities. Under this valuation, the unfunded liability for municipal governments including MERS and locally administered plans (and excluding the local portion of the teachers’ plan) swells from $2.4 billion to $6 billion. The unfunded liability for the state plans increases from $6.8 billion to $12 billion.

The result of this miscalculation is that many municipal governments are in far worse shape than is currently reported, which presents serious revenue challenges for a number of Rhode Island municipalities. Unfunded municipal pension liabilities currently exceed municipal revenues by $2.6 billion in Rhode Island. The revenue index created in this paper indicates that Johnston, Providence, Cranston, Newport, and Central Falls are all in particularly bad shape relative to other municipalities in the state.

Keywords: Rhode Island, state budget, budgets, unfunded liabilities, public pensions, state taxation

JEL Classification: H2, H7

Suggested Citation

Norcross, Eileen and VanMetre, Benjamin J., Rhode Island's Local Pension Debts (November 2011). Mercatus Working Paper, No. 11-43. Available at SSRN: https://ssrn.com/abstract=3245335 or http://dx.doi.org/10.2139/ssrn.3245335

Eileen Norcross (Contact Author)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States
703-993-4930 (Phone)

HOME PAGE: http://https://www.mercatus.org/eileen-norcross

Benjamin J. VanMetre

Mercatus Center, George Mason University ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

HOME PAGE: http://https://sites.google.com/site/benjaminjvanmetre/

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