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.
That’s the takeaway from an excellent bit of analysis by Jason Becker. ”A true COLA is key to ensuring that purchasing power is maintained throughout retirement,” he writes. “But the cost of goods has not increased 5% or 6% year-over-year ever in the past twenty years.”
Becker ran the numbers to compare what a Providence retiree with a $25,000 pension as of 1992 now receives thanks to 5% or 6% annual compounded cost-of-living adjustments, versus what the same retiree would now receive with a true COLA tied to inflation. Here’s what he found:
Inflation-tied COLA: $46,132
5% annual COLA: $63,174
6% annual COLA: $75,640
Treasurer Raimondo made a related point at Tuesday’s local pension workshop, saying it’s important for pension plan fiduciaries to figure out what they’re actually looking to provide their retirees. Before last November’s new law, ”the Rhode Island retirement system was designed to provide an employee with more income at retirement than they got when they were working,” she said. “Is that retirement security?”
It’s almost impossible to overstate the amount of damage done to Providence’s pension system by three decisions: the union-controlled Retirement Board’s costly COLA vote in 1989; Mayor Cianci’s consent decree agreeing to the COLAs in 1991; and the Rhode Island Supreme Court’s decision [pdf] upholding Cianci’s decree in 2000.
The crucial year on paper was 1996, when an earlier ruling first forced the city to acknowledge the pension benefits awarded in 1989 on its books. The city’s unfunded pension liability shot from $167 million to $412 million, and its funded level plunged from 64% to 41%.
Take a look at this chart – the bleeding hasn’t stopped:
To see the impact, look at former Fire Chief Gilbert McLaughlin, whose COLA has boosted his tax-free accidental disability pension by about $30,000 in the last three years alone, from $155,892 in 2008 to $185,672 now, records show. It’s estimated Providence’s pension fund has paid McLaughlin more than $2 million since 1992.
McLaughlin, a Warwick resident, is 75 years old in 2011. His annual pension will be $208,618 when he reaches age 77; $313,685 when he’s 84; $419,781 if he lives to be 89; and $796,871 if he makes it to the ripe old age of 100, estimates by WPRI.com show.
At that point, McLaughlin would have received roughly $13 million in pension benefits since his retirement.
The Rhode Island Senate was unwilling to help Providence shrink its crushing COLA payments as part of the pension law this month – even though one of its leaders was a driving force behind awarding them in the first place.
Senate Majority Leader Dominick Ruggerio, an influential member of Senate President M. Teresa Paiva Weed’s leadership team, sponsored legislation in the spring of 1989 to have the General Assembly ignore Providence’s leaders and double cost-of-living adjustments to police and fire retirees there.
Ruggerio’s bill sought to increase Providence public-safety retirees’ COLAs, from 3% to 6%, and to award new 3% COLAs to municipal workers, who received no annual increases at the time. But the senator’s path was blocked in May 1989 when the Rhode Island Supreme Court ruled that state lawmakers no longer had authority over the city pension system after Providence got home rule in 1983.
“Obviously, the Supreme Court decision renders the bill null and void,” Ruggerio told The Providence Journal at the time. A spokesman for Ruggerio, a North Providence Democrat who’s been in the Senate for 26 years and became majority leader last year, did not respond to a request for comment Tuesday about his proposal.
Ruggerio works for an arm of the Laborers International Union in Providence, whose Local 1033 affiliate is the largest city union. The Journal said Ruggerio “introduced the bill at the request of the city’s police and firefighter unions, which said the City Council had turned a deaf ear to their requests for pension adjustments.”
Providence City Council President Michael Solomon unveiled a special committee to tackle pensions on Thursday – the most tangible sign yet that city leaders plan to make the hot-button issue a major policy priority of their own this fiscal year.
“We’re struggling to make sure our pension system survives,” Mayor Angel Taveras said Wednesday at Common Cause Rhode Island’s annual meeting.
Solomon asked the new special Subcommittee on Pension Sustainability’s five members – David Salvatore, Michael Correia, Samuel Zurier, Sabina Matos, and Council Majority Leader Seth Yurdin - to come up with recommendations to address the city’s unfunded pension liability as well as its troubled disability pension system.
It’s no small set of problems. The city’s locally run pension system – which won’t get much help from the forthcoming Raimondo-Chafee bill – has an $829 million unfunded liability, leaving it just 34% funded, according to the city’s actuary, Buck Consultants.
That doesn’t include an even larger $1.5 billion unfunded liability for retiree health care – though that amount could shrink after Taveras got the General Assembly to pass legislation allowing him to force retirees to sign up for Medicare.