Cutting Pensions? They're Already Doing It (Sunday NY Times)

October 22, 2011
The Little State With a Big Mess
By MARY WILLIAMS WALSH
CRANSTON, R.I.

ON the night of Sept. 8, Gina M. Raimondo, a financier by trade, rolled up here with news no one wanted to hear: Rhode Island, she declared, was going broke.

Maybe not today, and maybe not tomorrow. But if current trends held, Ms. Raimondo warned, the Ocean State would soon look like Athens on the Narragansett: undersized and overextended. Its economy would wither. Jobs would vanish. The state would be hollowed out.

It is not the sort of message you might expect from Ms. Raimondo, a proud daughter of Providence, a successful venture capitalist and, not least, the current general treasurer of Rhode Island. But it is a message worth hearing. The smallest state in the union, it turns out, has a very big debt problem.

After decades of drift, denial and inaction, Rhode Island’s $14.8 billion pension system is in crisis. Ten cents of every state tax dollar now goes to retired public workers. Before long, Ms. Raimondo has been cautioning in whistle-stops here and across the state, that figure will climb perilously toward 20 cents. But the scary thing is that no one really knows. The Providence Journal recently tried to count all the municipal pension plans outside the state system and stopped at 155, conceding that it might have missed some. Even the Securities and Exchange Commission is asking questions, including the big one: Are these numbers for real?

“We’re in the fight of our lives for the future of this state,” Ms. Raimondo said in a recent interview. And if the fight is lost? “Either the pension fund runs out of money or cities go bankrupt.”

All of this might seem small in the scheme of national affairs. After all, this is Little Rhody (population: 1,052,567). But the nightmare scenario is that Ms. Raimondo has seen the future of America, and it is Rhode Island. As Wall Street fixates on the financial disaster in Greece, a fiscal wreck is playing out right here. And the odds are that it won’t be the last. Before this is over, many Americans may be forced to rethink what government means at the state and local level.

Economists have talked endlessly about a financial reckoning for the United States, of a moment in the not-so-far-away when the nation’s profligate ways catch up with it. But for Rhode Island, that moment is now. The state has moved to safeguard its bond investors, to avoid being locked out of the credit markets. Last week, the General Assembly went into special session and proposed rolling back benefits for public employees, including those who have already retired. Whether the plan will succeed is anyone’s guess.

Central Falls, a small city north of Providence, didn’t wait for news from the Statehouse. In August, the city filed for bankruptcy rather than keep its pension promises to its retired firefighters and police officers.

Illinois, California, Connecticut, Oklahoma, Michigan — the list of stretched states runs on. In Pennsylvania, the capital city, Harrisburg, filed for bankruptcy earlier this month to avoid having to use prized assets to pay off Wall Street creditors. In New Jersey, Gov. Chris Christie wants to roll back benefits, too.

In most places, as in Rhode Island, the big issue is pensions. By conventional measures, state and local pensions nationwide now face a combined shortfall of about $3 trillion. Officials argue that, by their accounting, the total is far less. But with pensions, hope often triumphs over experience. Until this year, Rhode Island calculated its pension numbers by assuming that its various funds would post an average annual return on their investments of 8.25 percent; the real number for the last decade is about 2.4 percent. A phrase that gets thrown around here, à la Rick Perry describing Social Security, is “Ponzi scheme.”

That evening in September, Ms. Raimondo walked into the Cranston Portuguese Club to face yet another angry audience. People like Paul L. Valletta Jr., the head of Local 1363 of the firefighters union.

“I want to get the biggest travesty out of the way here,” Mr. Valletta boomed from the back of the hall. “You’re going after the retirees! In this economic time, how could you possibly take a pension away?”

Someone else in the audience said Rhode Island was reneging on a moral obligation.

Ms. Raimondo, 40, stood her ground. Rhode Island, she said, had a choice: it could pay for schoolbooks, roadwork, care for the elderly and so on, or it could keep every promise to its retirees.

“I would ask you, is it morally right to do nothing, and not provide services to the state’s most vulnerable citizens?” she asked the crowd. “Yes, sir, I think this is moral.”

FOR many Americans, the Ocean State conjures images of Newport mansions and Narragansett chic. The overall reality is more prosaic. Rhode Island today is a place where the roads and bridges rank among the worst in the nation and where jobs are particularly hard to find. Unemployment rose faster during the 2008-9 recession than in any other state. The official jobless rate is now 10.6 percent, versus the national average of 9.1 percent.

The textile mills and jewelry manufacturers that once employed thousands here have dwindled away. The big employers today are in health care and education, both of which rely heavily on government spending that has been drying up.

Many states and cities can credibly say their pension plans are viable, even when those plans are not fully funded. That is because state retirement funds, like Social Security, pay out benefits bit by bit, over many years.

But unlike, say, California, with its large, diverse economy, Rhode Island is so small that there is little margin for error. Leaving the state, to escape its taxes, is almost as easy as moving to the other side of town. Efforts to balance the state budget by shrinking the public work force have left Rhode Island with a problem like the one that plagues General Motors: the state has more public-sector retirees than public-sector workers.

More ominous still, in each of the last 10 years, the state pension fund paid more money to retirees than the fund collected from state employees and taxpayers combined. The fund is shrinking, even though the benefits coming due are growing.

For all the pain here, one important constituency — Wall Street — seems satisfied enough. To reassure its bond investors, Rhode Island passed a special law this year giving them first dibs on tax revenue. In other words, bondholders will be paid, whatever happens. Ms. Raimondo has at times been accused of selling out ordinary Rhode Islanders to Wall Street interests, but she says hard choices must be made.

Ms. Raimondo remembers better times in Rhode Island. She grew up in a suburb of Providence, rode public buses to public schools and played in public parks. Her grandfather, who arrived from Italy, studied English in the evenings at the Providence Public Library. (That library system lost its financing from the city in 2009, closed branches and shortened its hours. These days, it is seldom open after 6 p.m.)

But 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.

BY any standard, Ms. Raimondo is a high achiever. She graduated from Harvard, collected a law degree from Yale and attended Oxford as a Rhodes scholar. After a stint in New York in the venture capital business, she helped found Rhode Island’s first venture capital firm, Point Judith Capital.

Then, in 2009, with zero political experience, she ran for the state office of treasurer. Although she is a Democrat in a heavily Democratic state, she stood out because she refused to promise that state jobs and pension benefits would be protected no matter what. She won by a landslide, receiving more votes than any other candidate for any state office. Her long-term ambitions, in politics, business or both, are the subject of speculation in Providence.

No sooner had she been sworn in than the S.E.C. called. She learned that the commission was investigating the finances of various cities and states, including Rhode Island, to determine whether bond investors were receiving truthful information. At the heart of the S.E.C. inquiry were pension funds.

Ms. Raimondo said she wasn’t entirely surprised. When she disclosed the investigation, she said: “For months, Rhode Island has been listed among several states with precarious finances. This challenging position is, in part, due to our significant and growing unfunded pension liability.” Her first priority, she vowed, would be to ensure that the numbers were right.

Others made similar pledges before. Rhode Island has been trying to fix its pension system for years; it has announced four “reform” plans since 2005, each of which has claimed to reduce costs for the state and cities. It has raised minimum retirement ages, slowed accrual rates, capped cost-of-living adjustments — but always for the youngest or least senior public workers. Retirees, and workers poised to retire, were spared, even though the numbers clearly showed that reducing payments to retirees was the only sure way to fix things quickly.

In recent months Ms. Raimondo has crisscrossed the state in an attempt to sell a different remedy, one in which everyone takes a hit. Yes, it would hurt. But at least the state would avoid having to come up with yet another plan in a year or two. The defined-benefit structure, very popular with public employees, could survive. Still, the battle lines are clear. Eight public workers’ unions have already sued, saying the pension changes of 2009 and 2010 were illegal.

On a September evening out in North Scituate, at the historic Old Congregational Church, Ms. Raimondo told a crowd about what had happened in Vallejo, Calif. That city filed for bankruptcy in 2009 and, after grueling negotiations, left pensions intact but drastically cut bus service, police patrols and other government functions, along with the pay of the city workers who provide all those services.

“That’s not what we want for Rhode Island,” Ms. Raimondo said. “That’s not the future we want for our children.”

Others in the crowd had their own stories. Several retired teachers said they had played by the rules and sent a part of every paycheck to the pension fund, as required by law. One man demanded pension cuts for state troopers and judges. A woman said her aged father would be unable to buy medicine if the state stopped adjusting his pension for inflation.

“I feel your anger,” Ms. Raimondo told the crowd. “In many ways, I’m angry myself. Many of the shenanigans that went on in past years were just wrong.”

In some ways, the central question is not only what the government owes to pensioners but what citizens owe to one another. From the pews of the church, Cindy Gould, a fourth-grade teacher, said that under the current system, she had 11 years to go until retirement. Under Ms. Raimondo’s plan, she might have to work longer. But, Ms. Gould, 54, said she was willing to do so if that meant the elderly would get the medical care they need.

Since the last recession hit, states and cities around the country have embarked on pension changes, often following the Rhode Island pattern. Benefits for state employees who have not yet been hired are usually the first to be cut. Then come changes for those now on the payroll, often in the form of higher mandatory contributions.

Retirees have mostly been off-limits, until now. In many instances, laws or legal precedent shield them. In the corporate sphere, they are supposed to bear losses only in bankruptcy. But those rules do not apply to states, which may not declare bankruptcy in any case. If a government homes in on retirees, a lawsuit is sure to follow, and the resolution will take years. But Ms. Raimondo says Rhode Island doesn’t have years. This isn’t a question of politics or law, she says, but of simple math. To get the numbers right, Ms. Raimondo quickly assembled a panel of experts that included academics, mayors and union officials. The goal was to figure out what a public pension should be and what Rhode Island could afford. Inflation protection every year, for people who in some cases retired in their 40s, started coming into focus.

Analysts also took a close look at the projected long-term investment return for the pension system: 8.25 percent. Everything rested on hitting that target, but the state’s actuary said there was less than a 30 percent chance that would happen over the next 20 years. The board voted to lower the assumption to 7.5 percent. (Given the recent run in the financial markets, even that figure may seem optimistic.)

As a result of that change, the state’s pension shortfall instantly rose to $9 billion from $7 billion. The unions said Ms. Raimondo had manufactured a crisis.

She denied it. “This is about the truth,” she said, “and about doing the right thing.”

Then, as if on cue, Central Falls declared bankruptcy. The city’s pension fund wasn’t just underfunded. It was completely out of money. A receiver for the city sought court permission to reduce by as much as half the base pensions of retired police officers and firefighters.

Suddenly the pension crisis wasn’t an abstraction any more. The unthinkable had happened, and the odds were that it would happen again unless the state acted quickly.

Other mayors began stepping forward and warning that their communities were on the brink, too. Here in Cranston, Mayor Allan W. Fung said that unless things changed, he would have to eliminate trash collection, services to the elderly and recreation programs for children, as well as reduce the size of the police force and fire department.

Over in Woonsocket, John W. Ward, the president of the City Council, said that all summer parks programs had been eliminated and that teachers were working with larger classes than their contracts allowed. Half of Woonsocket’s streetlights were out because the city couldn’t afford to replace them. His son, daughter-in-law and granddaughter had moved to another state.

“To allow the pension system to remain largely unchanged will make it impossible for Woonsocket, and every other urban community, to survive,” Mr. Ward said.

AT the Portuguese Club in Cranston, José M. Berto raised his hand. At 62, he told Ms. Raimondo, he was on the cusp of retirement.

“We’re looking at a Ponzi scheme that would make Bernie Madoff look like a Boy Scout,” said Mr. Berto, a supply officer for the state.

He asked if Rhode Island’s pension problem was the worst in the nation.

Ms. Raimondo said it was.

“I don’t like her message,” Mr. Berto said after the session. “But she has been honest, forthcoming. We’re in trouble. We’re just in so much trouble.”

Beware the Wealth Killers (from Ken and Daria Dolan)

Dolans.com
Beware These 9 Wealth Killers
by Ken Dolan October 22, 2008 10:13 AM
Posted in: Family & Money

These are scary times, indeed. Even the talking heads on TV tell us that we're in uncharted territory. And based on our 20+ years of experience in the financial business, this is one of the few times that we actually agree with them!

Between economic (and natural) catastrophes...banking disasters...more and more scams…and bad news upon more bad news, it's no wonder that people are tempted to stuff their cash under their mattress!

Yes, it's been a tough year to grow your money. But to make matters even worse, there are also serious threats that can eat away at your hard-earned dollars.

As they say, "Forewarned is forearmed." If you know what threats are out there, you can take steps now to protect your money.

To that end, we've pulled together these top 9 threats to guard against AND what you must do about them. Read on...

Money Threat #1: Inflation.
Dare we say the dreaded "I" word? (May as well since we're in the thick of inflation now!)

Inflation affects more than just the cost of the products you buy – it can also affect the price of your loans since inflation generally pushes interest rates up…not to mention that it can negatively influence your investments because many companies grow more slowly during inflationary times.

Sit tight. Prices will eventually drop again – they always do. In the meantime, cut corners where you can. Save more. You should also start a "rainy day" fund, if you don't have one already. You can quickly calculate how much you need to set aside for emergencies here. (/calculators/How_Much_Do_I_Need_For_Emergencies.html)



Money Threat #2: Stock market losses.
In the midst of the banking crisis and the tumbling real estate and mortgage markets, woe is Wall Street. This turmoil in the stock market affects your retirement, your savings and your financial health as a whole.

Whatever you do, don't spend one more day invested in stocks if you're uncomfortable doing so. Rule #1 in our 10 Simple Rules of Investing (/invest_wisely/dolans_10_rules_of_investing.html) is to "Know thy sleep quotient." In a nutshell, that means reduce your risk if you're staying awake at night worrying about your investments.

Remember: There are always safer places to put your money. Just don't lose your shirt in THESE investments.

Money Threat #3: Bank problems
Many of us who never worried about the safety of our assets in a bank are now very concerned…with good reason. This whole financial crisis is FAR from over.

You can never be too cautious, so first check the safety of your bank through Veribanc (http://www.veribanc.com/ConsumerReports.php) (800/44-BANKS). They provide ratings on all U.S. federally-insured financial institutions. Another source is Weiss Ratings (http://www.weissratings.com/) , which includes a free list of the strongest- and weakest-rated banks in the nation. (You should also be aware of our 5 Warning Signs Your Bank Could Be In Trouble. (/banking/bank-failure-warning-signs.html) )

Also, make sure that your bank is FDIC insured. But don't be hasty – you need to know specifically what's covered and what's not. Find out in How to Protect Your Bank Deposits (/banking/fdic-insurance.html)

Money Threat #4: Weak dollar.
You may think that our weak dollar only affects us if we travel overseas. Not true.

It actually poses a lot of problems for our personal wealth as well. Since we don't manufacture much in the U.S. anymore, a lot of the products we purchase – from cars and wines to toys and clothes – are imported from foreign markets. A weak dollar makes them more expensive.

Also, since we're so dependent on foreign oil, a weak dollar keeps fuel costs high AND, as interest rates remain low, we don't earn as much on investments like CDs and bonds.

One solution, if you can stand the volatility and risk, is to consider a small investment in gold. (Click here for 4 ways to profit from a weak dollar. (/invest_wisely/investing_with_a_weak_dollar.html) )

Money Threat #5: The Presidential election.
We're not about to tell you who to vote for, but you need to know how Wall Street reacts when it comes to electing our highest public official.

Typically, if a Democrat is winning in the weeks leading up to an election, the stock market goes crazy and sells off in advance. It then usually rallies sometime after the new president takes his oath.

On the other hand, if a Republican is winning, the market usually rallies beforehand, then typically sells off not long after he takes office.

No matter what happens, if you plan to stay in the market (and we think it's treacherous to be there at the moment), be prepared for some short-term losses at the very least.

[Money Threat #6: Fluctuating energy prices.
Sure, gas prices are dropping...but for how long? (As long as we're importing oil, the risk of skyrocketing prices will always be there!)

Higher energy prices affect more than just the prices at the pump. They often lead to higher prices not only for essential goods such as food, but for just about anything that needs to be transported by truck or air.

They have a profound impact on your everyday products, not to mention the economy at large. And historically speaking, recessions often follow oil price surges.

What to do? The key is conservation. Slow down the demand. Carpool to work or take public transportation (or work from home a few days a week if your company allows it). You can find four other ways to save gas here (/save_more/gallery/high-gas-prices.html) .

Money Threat #7: Excessive household debt.
In The Millionaire Next Door, authors Thomas Stanley and William Danko noted that most self-made millionaires save or invest 15 to 20 percent of their income. The other side of the coin is that average Americans spend 18% of their disposable income paying off their debts. What a nightmare!

The obvious lesson learned is you'll never become a millionaire when you have a desk full of loans and credit card bills to pay each month. Find out how to become completely debt-free in 10 simple steps. (/debt_management/gallery/living-debt-free.html)

Money Threat #8: Being under-insured.
It's estimated that two out of three homes nationwide are under-insured. That's a scary statistic – especially in light of all of the natural disasters over the last few months.

Here's another frightening fact: Many homeowners with older insurance policies don't know that since the late 1990s they've had to specifically request a "guaranteed replacement" policy. Meaning if they don't, their policy may set pay-out limits that may not be enough to cover the cost to repair or rebuild their home. In the unlikely event of a disaster, the potential financial loss is staggering.

Eliminate your risk. Check your homeowner's policy. Then get our checklist to be sure you're prepared, just in case: What to Do When Disaster Strikes (/family_money/gallery/what-to-do-when-disaster-strikes.html) .

Money Threat #9: Money scams
If you receive an offer in the mail (or from a telemarketer) that sounds too good to be true, either look at it more closely…or, even better, pitch it.

One piece of mail you're much better off ignoring is a letter promising "mortgage rescue assistance." It has 'scam' written all over it. Remember, you do not and should not pay money to ANYONE to stay out of foreclosure. If you need help, consult a real estate attorney or call HOPE NOW at 1-800-995-HOPE

And…if you have a child applying to colleges this year, beware the scholarship scams, which "guarantee" a scholarship for a $50 to $1,500 fee. Ha!

Don't forget to forward this information to a friend who may need it!



Copyright © 2011 Dolans.com. All Rights Reserved.

Preferred Stocks for Real Estate Investment Trusts (Forbes.com)

Investing
A Preferred Path To REIT Income
Peter Slatin, 11.07.11, 6:00 PM ET


I'll put it to you plainly: REITs are overpriced. Many investors have bought into a broad recovery in this sector, but I am afraid prices have gotten ahead of themselves. Yes, I am aware that REITs, as measured by SNL's index, fell 15% in the third quarter. Still, I believe most are richly priced.

The problem, of course, is fading economic growth, and it's a bit of a vicious cycle. The weak economy and uncertainty at home is causing violent stock market gyrations. Things are even worse in Europe. This is gnawing away at banks' health and wellbeing, and they are reluctant to step up and make loans. Economic expansions that fill space in the real estate market require financing. With lenders under pressure and whining about woes, it's hard to imagine a speedy restart to the recovery. It sounds pretty bad, but there are still a few compelling opportunities for investors willing to take a little risk. “Buying on bad news” or when a nervous market clouds valuations is one of the core strategies of successful value investing. When this economy and the REIT market turn, the forward momentum will be sharp: REITs have slashed their debt levels and stocked up on cash, which means that, barring total disaster, it is only a matter of time before the best among the group move ahead again.

In the meantime there is a somewhat safer place for weary real estate investors looking for big yields: REIT preferred shares. These securities are less well-known, but since they are higher up in the companies' capital structure, they take priority over REIT common share owners when it comes to paying out cash dividends.

These days REIT preferreds tend to sell at a 10% to 15% discount to their par value, which is typically $25. Oh, and did I mention that the dividend yields now are averaging about 8%? REIT preferreds tend to be less volatile than REIT common shares, but the downside of lower volatility is lower liquidity. Trading volume is low. The higher yields mean that there is some risk that management could call in shares. But they can't do so for the first five years after issuance and, with their current discounts, an early call translates into capital gains.

Buying individual preferred issues is challenging, though not impossible. You want companies with great balance sheets and a good track record. Longtime REIT watchers often cite the preferred shares of Public Storage as the gold standard. Today Public Storage's preferreds are trading slightly above par and have a current yield of 6.7%.

I recommend using funds to play the REIT preferred-yield game. My top pick is FORWARD SELECT INCOME FUND (KIFAX, 21), a ten-year-old no-load mutual fund with $1.1 billion in assets under management. Its current yield is 9.4%.

Another good bet just got better. Lazard Asset Management just acquired the REIT mutual funds from Grubb & Ellis Alesco Global Advisors, still managed by Jay Leupp and David Ronco. Lazard is sure to add seed capital to bulk up these underfunded yet well-performing funds, which languished under prior sponsorship but still produced great results. Buy LAZARD U.S. REALTY INCOME PORTFOLIO (LRIOX, 9), currently weighted about 60% toward preferreds. Among its holdings are the Glimcher Realty Trust Series F, a mall REIT, and Hersha Hospitality Trust Series B, a hotel REIT, yielding 9.4% and 9.2%, respectively. The tiny fund is offering a current yield of 6%.

COHEN & STEERS REIT & PREFERRED INCOME FUND (RNP, 13) is a closed-end fund that has just under $1.2 billion in assets and is run by the 800-pound gorilla of REIT managers. If you want quality, New York City's Cohen & Steers has a sterling reputation, and this fund has a yield of 6.7%.

If preferreds are too slow and steady for you, here's a health care REIT whose common shares provide preferred-type yields as well as strong growth prospects. LTC PROPERTIES (LTC, 26) is the owner of a basket of long-term, net-leased properties devoted to senior care, from assisted living to skilled nursing. The 19-year-old southern California company has a $790 million market cap and a dividend yield of 6.6%. LTC has 207 properties in 30 states, plenty of cash on hand and a solid management team. I expect it to continue growing despite the sluggisheconomy.


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PETER SLATIN IS EDITOR OF THE FORBES/SLATIN REAL ESTATE REPORT (SEE FORBES.COM/SLATIN ) AND EDITORIAL DIRECTOR OF REAL CAPITAL ANALYTICS