Providence pension tab tops $900M with lower investment rate

January 31st, 2012 at 6:00 am by under Nesi's Notes, On the Main Site

By Ted Nesi

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.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

More coverage of Providence’s pension crisis on WPRI.com:

Tags: , , , , , , ,

11 Responses to “Providence pension tab tops $900M with lower investment rate”

  1. Phrankie says:

    “It’s not really my place to say. I don’t know enough.” But she offers her opinion anyway….

  2. Jake says:

    If the market value is $362 million, but the actuarially reported assets are $423 million, and the rate of return is now 8.25%, and they use a five-year averaging method, how long and under what conditions will it take to get the fund’s true value to catch up to the reported value?

    Bonus question: What is the true unfunded liability and funded percentage based on the market value of the assets?

    Double bonus question: What is the true total and unfunded liability using the state’s expected rate of return and using the market value os assets?

  3. Cosmo says:

    If anybody out there thinks 8.25% is reasonable please let me have some of what you’re smoking.

    1. Ed says:

      Cosmo, I agree with you! If the primary investment firm would do more plain vanillia investments instead of the sophisticated investments which by the way pay a higher commission I bet the city would be closer to the 8.25%.
      I would love to know how much the investment manager is investing in the Dogs of the Dow? If they are selling naked puts on quaility stocks and then selling covered calls on the stocks they own.
      This is basic investing. No buying malls, office buildings or playing commodities, which in some cases can pay handsomely if done appropriately.

  4. Jane says:

    Im glad Providence isn’t cooking the books like some others have chosen to do. Honesty in these tough times is important and every tough decision the Mayor makes — makes me think he’s the only one to trust these days.

    1. GaryM says:

      “Providence isn’t cooking the books…”???

      Jane, 8.25% compounded annual returns (you have to compound the returns to get the true calculation)is not just foolish thinking, but is in fact “cooking the books”.

  5. [...] 14. RHODE ISLAND NEWS: “Providence pension tab tops 900,000,000d with lower investment rate,” by Ted Nesi (WPRI (Providence) Channel 12 News blog, Jan. 31, 2012). blogs.wpri.com… [...]

  6. Downsized54 says:

    But yet Taft carter does not seem to see any trouble coming

  7. Math Wonk says:

    Isn’t Providence actually getting 8.25% in returns? If the answer is yes, who is the one cooking the books? It certainly wouldn’t be Providence!

    1. GaryM says:

      Wonk,

      Most who are getting great returns for the past couple of years are bouncing off the bottom when the S&P 500 dropped to a low of 666.

      The issue is the probability that the markets will in the future will exceed the real rate of growth on a long term compounded basis.

      That is highly unlikely moving forward when global GDP is down in the 3-4% range and interest rates on the 10 year Treasury sit below 2%.

  8. [...] in office, along with market losses in 2002 and 2008, as key drivers of the city’s ballooning $901 million unfunded pension liability. “The city greatly underfunded its local pension system from 1998 through 2003, shifting the [...]