Providence’s pension plan could be in far worse shape than the official figures show.
The city-run system was only 34% funded as of June 30, 2010, with $428 million in assets saved to cover $1.3 billion in future pension payments, leaving an unfunded liability of $829 million, according to Buck Consultants, the city’s actuaries.
But those numbers assume the city pension fund’s investments will grow an average of 8.5% a year over the coming decades, the highest figure used by any Rhode Island government. Only two other cities – East Providence and Smithfield – also assume an 8.5% return, according to the auditor general’s office.
There is a heated debate right now among experts about what represents an appropriate investment return forecast for pension funds. The answer matters because using a lower number would force taxpayers to put more money into their pension systems, leaving less to spend on other priorities like roads and schools.
Providence Mayor Angel Taveras’ office, the Retirement Board and Buck Consultants are discussing whether they should lower the city’s rate of return from 8.5% to 8.25% going forward, as well as change the salary scale and mortality assumptions they use, said David Ortiz, a spokesman for the mayor.
“According to Buck, these changes would not substantially alter the city’s required contribution to the pension system or its liabilities,” Ortiz said.
That’s a key concern for the Taveras administration. Providence spent $70 million on pension contributions in 2009-10, amounting to about 18% of the total city budget. The cash-strapped capital would struggle to find more money for pensions if technical changes make the required deposits jump.
That hasn’t stopped officials at the state level. In April, General Treasurer Gina Raimondo pushed through a dramatic change by getting the Retirement Board to reduce its return forecast from 8.25% to 7.5%. That and other adjustments made Rhode Island’s unfunded pension liability balloon from $4.9 billion to $7.3 billion.
“It was a very difficult vote,” Raimondo, who describes her philosophy as one embracing “truth in numbers,” said at the time. The April vote put Providence’s hoped-for investment return a full percentage point above the state’s.
Raimondo’s office declined to comment on what the Taveras administration should do. The 12-member pension advisory group appointed by Raimondo and Gov. Lincoln Chafee, which began meeting this week, will examine locally run pension plans like Providence’s in addition to the state system.
Providence taxpayers contribute to three pension funds: the city’s locally run system for most municipal employees, including police and fire personnel; the state-run system for teachers; and a union-administered system for members of Local 1033 that supplements their city pension.
The city has made its full required deposit to the locally run pension fund only three times since 1995-96, once during the Cianci administration and twice during the Cicilline administration, according to Buck Consultants. The taxpayer contribution to that fund is projected to rise from $56 million in 2010-11 to $90 million in 2020-21 and $210 million in 2039-40 if nothing changes.
The investment forecast for Providence’s locally run system has been set at 8.5% since at least 1995, and over the last few decades the fund’s returns have met or exceeded that figure, according to Ortiz.
“In comparing Providence’s pension system to the state’s it is important to not just look at the assumed rates of return in a vacuum,” he said. “The return is driven by the asset mix. You have to look at where the money is being invested in each system.”
Providence’s pension liability would grow to $1.46 billion if its investment return forecast was 7%, according to an estimate prepared by Fitch Ratings in New York obtained by WPRI.com.
Fitch analyst Kevin Dolan cautioned that the $1.46 billion figure is “an approximate valuation” based on a formula his agency uses to compare different governments’ pension liabilities.
The liability estimate for Providence’s pension system does not include an additional $1.5 billion in health benefits the city has promised retirees. The city currently pays medical claims as they come in rather than pre-funding them.
Fitch downgraded Providence’s bond rating in March, citing its “severely underfunded and growing” liabilities for “onerous” pensions and retiree health benefits, though the agency did say the city “prudently funds” nearly its entire pension contribution annually.
“The poorly funded status of the [city's pension] plan is the result of inadequate funding in prior years … generous benefits and cost-of-living increases, liberal disability pension provisions and the ability to collect benefits at an early age,” according to a March report by a fiscal review panel Taveras appointed.
The panel’s report also suggested the city should “revisit” the 8.5% return assumption to see whether its pension liabilities “are appropriately valued based on realistic long-term investment return expectations.”
A recent Congressional Budget Office report suggested governments could compromise by estimating their liabilities twice, using more conservative assumptions for informational purposes but more aggressive ones to determine how much taxpayer money a pension fund needs annually.
The city’s locally run pension system provided pensions to 2,929 retirees and other beneficiaries in 2009-10, according to Buck Consultants. The average annual payment was $26,968.
(photo: Bruce Morin/WPRI)