Providence pension tab tops $900M with lower investment rateJanuary 31st, 2012 at 6:00 am by Ted Nesi under Nesi's Notes, On the Main Site
PROVIDENCE, R.I. (WPRI) – The shortfall in Providence’s city pension fund climbed to nearly $901 million last year, a one-year jump of $72 million, after the Taveras administration ordered its actuary to lower its investment earnings forecast.
Providence had $423 million in assets saved to cover $1.32 billion in promised pension benefits as of June 30, 2011, according to a new report from city actuary Buck Consultants. The city pension system’s funded ratio fell from 34% to 32% compared with a year earlier.
The increase in the city’s unfunded pension liability would have been a more modest $37.5 million if the administration and Buck hadn’t changed some of the assumptions driving the data, including forecasts of mortality levels, interest rates, scalary scales and longevity assumptions.
The most notable change is a reduction in the average annual rate of return Providence expects its pension fund to earn over the long term, to 8.25%. The capital had been one of only three cities in Rhode Island using an 8.5% rate of return for its pension fund, the highest level in the state. A higher rate means a lower liability on paper.
“This is an issue of credibility for the administration, and we’re very confident that 8.25% is a responsible and realistic assumption in Providence,” David Ortiz, a spokesman for Providence Mayor Angel Taveras, told WPRI.com.
Last year, Treasurer Gina Raimondo persuaded the state Retirement Board to lower the Rhode Island pension fund’s rate of return forecast from 8.25% to 7.5%, which helped cause an explosion in its unfunded liability. Allan Emkin, the state’s asset advisor, has said achieving even the new 7.5% return will be “a challenge.”
Providence invests its pension fund assets more aggressively than the state, according to data provided by Buck. As of Nov. 1, 85% of the city’s pension fund was invested in equities, compared with 64% of the state-run pension fund for municipalities. That exposes the city to more risk but also could win it greater returns.
In an interview last week, Raimondo expressed some skepticism about whether a higher-risk investment allocation makes sense for a plan that only has about one-third of the assets it will need to pay benefits over the next three decades.
“It’s hard to understand how that does match up – a severely underfunded pension plan with a high-risk asset class that would allow an achievement of an 8.5% pension return,” the treasurer told WPRI.com. But, she added, “It’s not really my place to say. I don’t know enough.”
Providence officials say that unlike the state pension fund, the city’s has positive cash flow, meaning it takes in more money annually than it pays out to the fund’s 2,998 retirees and beneficiaries.
Providence’s pension fund has yet to recover from the losses it sustained in the market crash. The market value of its assets was $362 million last June, down from $414 million in July 2007, Buck said. The market value of the fund’s assets differs from its actuarial value because the actuary uses a five-year average.
More coverage of Providence’s pension crisis on WPRI.com:
- Providence is only no-show at Raimondo’s local pension event (Jan. 24)
- COLA means $796,871 pension for ex-fire chief if he lives to 100 (Nov. 30)
- Sen. Ruggerio tried to award 6% pension COLAs in Providence (Nov. 30)
- Mansolillo: Providence pension fund hit by ‘comedy of errors’ (Nov. 28)
- Chafee, Taveras plea for pension aid for ‘too-big-to-fail’ cities (Oct. 18)
- Providence pensions look like next target for Taveras, council (Oct. 7)