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					                Special House Commission to Study Pension and Retirement
                                System of Rhode Island
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                 Ernest A. Almonte CPA, CFE,
                            CGFM
                                                 Auditor General

                            _____________________________________________________________________________________________________________________________________________


                          Office of the Auditor General - State of Rhode Island
                                        Office of the Auditor General
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                                                                         “Core Values”


                                                                               Integrity
                                                                         Independence
                                                                        Accountability
                                                                             Reliability



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                          Office of the Auditor General - State of Rhode Island
                                             Office of the Auditor General
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                                                                “Mission Statement”


              The Office of the Auditor General exists to support the State
                Legislature and Federal Government in meeting their
                constitutional responsibilities and to help improve the
                   performance and accountability of government.



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                          Office of the Auditor General - State of Rhode Island
                                                                    Background
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              • Auditor General for the State of Rhode Island
              • Graduate of Bryant College (BSBA and Masters)
              • Harvard JFK School of Government (SESLG)
              • CPA, CFE, CGFM
              • “Yellow Book” Advisory Committee & Domestic Group
              • American Institute of Certified Public Accountants
                    (Vice Chair of Board)
              • National State Auditors Association ( Past President)
              •                 Rhode Island Society of CPAs (Past President)
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                          Office of the Auditor General - State of Rhode Island
                                                   Management and Staff
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               Auditors - 36
                       Certified Public Accountants - 18
                       Certified Fraud Examiners - 8
                       Certified Government Financial Managers - 2
                       Certified Information Systems Auditors - 3
                       Advanced Degrees (Masters) - 8


              •WHO AUDITS US? NSAA Quality Review

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                          Office of the Auditor General - State of Rhode Island
                                                              What do we do?
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              • Annual Single Audit for the State of Rhode Island – includes
                the State’s financial statements and federal program
                compliance
              • Performance audits
              • Agreed upon procedure audits
              • Fraud audits
              • Oversight on Municipal audits and Municipal financial health
              • Cap on Property Taxes as it relates to emergency expenditures


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                          Office of the Auditor General - State of Rhode Island
Employees' Retirement System of the State of Rhode Island
                         Employee and Employer Contribution Rates
                                       2001 - 2008


                 State                   Teachers                       State Police                       Judges


        Employer     Employee      Employer*       Employee         Employer        Employee        Employer   Employee

 2001    7.99%           8.75%       12.01%          9.50%           25.89%           8.75%          31.09%     8.75%

 2002    5.59%           8.75%       9.95%           9.50%           27.10%           8.75%          30.66%     8.75%

 2003    7.68%           8.75%       11.97%          9.50%           27.48%           8.75%          33.42%     8.75%

 2004    9.60%           8.75%       13.72%          9.50%           26.77%           8.75%          33.90%     8.75%

 2005    11.51%          8.75%       14.84%          9.50%           28.87%           8.75%          36.19%     8.75%

 2006    14.84%          8.75%       16.47%          9.50%           31.35%           8.75%          35.51%     8.75%

 2007    18.40%          8.75%       19.64%          9.50%           31.78%           8.75%          36.07%     8.75%

 2008    20.77%          8.75%       22.01%          9.50%           31.00%           8.75%          32.07%     8.75%




                    *Employer Contribution rate is shared between the state and local community for Teachers
                        Employees' Retirement System of
                           the State of Rhode Island
                                           Funded Ratio Analysis - Judges

                100.0%
                 90.0%
                 80.0%
Funded Ratio*




                 70.0%
                 60.0%
                 50.0%
                 40.0%
                 30.0%
                 20.0%
                 10.0%
                  0.0%         1996      1997      1998      1999      2000      2001      2002      2003      2004         2005   2006
                Funded Ratio   0.971    0.743     0.816     0.745      0.759     0.764     0.685     0.72      0.733        0.87   0.868
                                                                               Year


                        *Funded Ratio represents the Actuarial Value of Assets divided by the Actuarial Accrued Liability
                        Employees' Retirement System of
                           the State of Rhode Island
                                       Funded Ratio Analysis - State Police
                100.0%
                 90.0%
Funded Ratio*




                 80.0%
                 70.0%
                 60.0%
                 50.0%
                 40.0%
                 30.0%
                 20.0%
                 10.0%
                  0.0%          1996      1997      1998      1999       2000      2001      2002      2003       2004      2005   2006
                Funded Ratio   0.848      0.894     0.921     0.782      0.815     0.864     0.755     0.737      0.758     0.79   0.86
                                                                                 Year



                        *Funded Ratio represents the Actuarial Value of Assets divided by the Actuarial Accrued Liability
                         Employees' Retirement System of the
                               State of Rhode Island
                                  Funded Ratio Analysis - Municipal Employees
                140.0%
                130.0%
                120.0%
                110.0%
Funded Ratio*




                100.0%
                 90.0%
                 80.0%
                 70.0%
                 60.0%
                 50.0%
                 40.0%
                 30.0%
                 20.0%
                 10.0%
                  0.0%          1996       1997       1998      1999       2000      2001       2002      2003       2004      2005    2006
                 Funded Ratio   1.214      1.329     1.288      1.267     1.246      1.181      1.113     1.007      0.932     0.872   0.871
                                                                                  Year



                           *Funded Ratio represents the Actuarial Value of Assets divided by the Actuarial Accrued Liability
                               Employees' Retirement System of the
                                     State of Rhode Island
                                             Funded Ratio Analysis - Teachers
                100.0%
                 90.0%
                 80.0%
Funded Ratio*




                 70.0%
                 60.0%
                 50.0%
                 40.0%
                 30.0%
                 20.0%
                 10.0%
                  0.0%          1996      1997      1998      1999      2000      2001       2002      2003      2004    2005    2006
                Funded Ratio    0.74      0.734     0.762     0.821     0.806     0.774     0.732      0.642     0.593   0.554   0.527

                                                                                 Year



                     *Funded Ratio represents the Actuarial Value of Assets divided by the Actuarial Accrued Liability
                         Employees' Retirement System of the
                               State of Rhode Island
                                          Fund Ratio Analysis - State Employees
                100.0%
                 90.0%
                 80.0%
Funded Ratio*




                 70.0%
                 60.0%
                 50.0%
                 40.0%
                 30.0%
                 20.0%
                 10.0%
                  0.0%           1996      1997      1998      1999       2000      2001      2002      2003       2004    2005    2006
                 Funded Ratio    0.775     0.783     0.806     0.844      0.816     0.779     0.717     0.645      0.596   0.563   0.546

                                                                                    Year




                       *Funded Ratio represents the Actuarial Value of Assets divided by the Actuarial Accrued Liability
             Reasons Actuary Cited for Declines in Funded Ratios

The Retirement System asked its actuary to analyze the declines in the funded ratios
since 1999 for ERS (state employees and teachers). Its report dated 4-19-07 cited
two primary causes as outlined below:


  1) The asset losses are the single largest cause for the increase in the
  unfunded liability (this represented about 58% of the decline)

  2) The next largest component is the “liability losses” – i.e., greater than
  expected      liabilities, due primarily to (these represented about 20% of the
  decline):



       •   retirees living longer than anticipated under assumptions used
       •   less turnover than expected
       •   larger salaries increases than anticipated, and
       •   earlier retirements than anticipated.
                                    Employer Contribution Rates

                     40.0%
                     35.0%
Contribution Rates




                     30.0%
                     25.0%                                             State Employees
                                                                       Teachers
                     20.0%
                                                                       State Police
                     15.0%                                             Judges
                     10.0%
                     5.0%
                     0.0%
                             2001 2002 2003 2004 2005 2006 2007 2008
                                             Years
                                        Investment
                                         Earnings
                                           63%




                     Employee
                    Contributions                     Employer
                       12%                           Contributions
                                                        25%

   The Bulk of Public Pension Benefit Funding in NOT Shouldered by Taxpayers.
Employer (taxpayer) contributions to state and local pension systems over the last two
decades have made up only one-forth of total public pension revenue. Earnings from
investments and employee contributions comprise the remainder.

Unlike corporate workers, most public employees are required to contribute to their pensions
plans. The chart above summarizes the sources of public pension revenue from 1983 through
2004.
                            COLA % OR        COMPOUNDED OR     RHODE ISLAND
                            DOLLAR           NON-COMPOUNDED    GENERAL LAW
PLAN                        AMOUNT

ERS (STATE and TEACHERS)          3%         COMPOUNDED        State 36-10-35
                                                               Teachers 16-16-40

MERS                          Generally 3%   NON-COMPOUNDED    45-21-52
                              (see Note 1)      (see Note 2)

TRAFFIC TRIBUNAL and              3%         COMPOUNDED        8-8.2-12 and
WORKERS COMP Judges                                            28-30-18

SUPREME, SUPERIOR,                3%         NON-COMPOUNDED    8-3-15
DISTRICT and FAMILY COURT
Judges
STATE POLICE                  $1,500/YEAR    NON-COMPOUNDED    42-28-22

CRANSTON POLICE                   3%         COMPOUNDED        45-21.2-5

CRANSTON FIRE                     3%         COMPOUNDED        45-21.2-5
             Special House Commission to Study Pension and Retirement
                              System of Rhode Island
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                • Actuarial Assumptions
                         – Retirement Age
                         – Mortality tables
                         – Rate of return (upper end of range)
                         – Several others
                         – Look back (actual vs. assumption)
                         • Impact on unfunded liability

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                          Office of the Auditor General - State of Rhode Island
                    Special House Commission to Study Pension and Retirement
                                     System of Rhode Island
________________________________________________________________________________________________________________________________________________________________________________




                • Human Capital Issue
                • Cross Generational Issue
                • Unfunded Ratios Remain unacceptably
                  high – System is unsustainable
                • The State Retirement System needs to
                  be managed in a way which:
                         – Safeguards the interest of the taxpayers
                         – Safeguard the interest of the beneficiaries
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                          Office of the Auditor General - State of Rhode Island
                Special House Commission to Study Pension and Retirement
                                 System of Rhode Island
________________________________________________________________________________________________________________________________________________________________________________




                • Risks of Pension Obligation Bonds
                         – Standard and Poor’s Report




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                          Office of the Auditor General - -State of Rhode Island
                                         Office of the Auditor General
                                                               Presentation to Senate Finance
              Special House Commission to Study Pension and Retirement
                               System of Rhode Island
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                • Concerns regarding Unfunded Pensions
                         – Effect on Taxpayers
                         – Ability to meet benefit payments promised
                           to retirees
                         – Effect on other services
                         – Negative impact on the overall financial
                           health of the state when not properly
                           funded
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                          Office of the Auditor General - State of Rhode Island
             Special House Commission to Study Pension and Retirement
                              System of Rhode Island
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                • Preliminary Recommendations
                         – Fiscal note detailing the impact on
                           contribution rates and the funded status of
                           plan when pension benefits are affected by
                           collective bargaining agreements
                         – Look at the feasibility of defined
                           contribution plans
                         – Tie the retirement age to the federal social
                           security retirement age
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                          Office of the Auditor General - State of Rhode Island
              Special House Commission to Study Pension and Retirement
                               System of Rhode Island
________________________________________________________________________________________________________________________________________________________________________________




                • Preliminary Recommendations
                         – Hybrid plan like the federal government
                           (some defined benefit and some defined
                           contribution)
                         – Reduce the benefits
                         – With all of these recommendations – please
                           keep in mind the human capital issue
                         – Rating agencies would look favorably upon
                           measures that reduce costs in the long
                           term
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                          Office of the Auditor General - State of Rhode Island
                Special House Commission to Study Pension and Retirement
                                System of Rhode Island
________________________________________________________________________________________________________________________________________________________________________________




                                    Ernest A. Almonte CPA, CFE, CGFM
                                                                 Auditor General
                           86 Weybosset Street, Providence, RI 02903
                                                                    401-222-2435
                                                                 www.oag.ri.gov



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                          Office of the Auditor General - State of Rhode Island

				
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