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Pension Taxes - How Much Do You Owe?

Thursday, March 08, 2012

 

More than a quarter of all local tax collections in Rhode Island are owed to public retiree benefits, with the tab coming out to about half of all the tax revenue in five of the most fiscally troubled cities, a GoLocalProv review of state data has found.

 

A top taxpayer advocate said the data should send a “red flag” to taxpayers across the state.

“If taxpayers think the tax burden in local communities is already high, this data shows we are headed for more foreclosures, more people leaving and just more taxpayers getting into their own debt because the burden will only grow unless we can reverse these soaring pension obligations,” said Harriet Lloyd, executive director of the Rhode Island Statewide Coalition.

Pensions—Half of Tax Revenues in Six Communities

Topping the list is Woonsocket, where retiree costs amount to 61 percent of local taxes. Likewise, pensions would have eaten up 57 percent of taxes in Central Falls, had the city kept up with its bills. In Providence, half of each dollar in tax revenue is owed to retirees. In Johnston and Pawtucket, it’s just under half. (See below charts for complete listings of all 39 cities and towns.)

“When you have at least one fourth of our cities and towns losing 25 percent of their entire tax levy just to pay out their retired workforce and about half a dozen communities facing pension obligations that are draining more than half of their tax levy—over 50 percent—you’re headed for collapsing cities,” Lloyd said.

Out of $2 billion levied in local property taxes across Rhode Island in 2010, a total of $544 million, or 26.7 percent, was needed to keep local retirement plans afloat, according to 2010 data collected by the Rhode Island Auditor General. (The figures include what communities owe to the state MERS and ERS plans as well as their own locally administered plans. The numbers encompass pensions and retiree health care costs, known as Other Post Employment Benefits, or OPEB.)

Not everyone is paying what they owe, however.

 

Woonsocket was barely able to cough up one percent of what was due to its local pension funds in 2010. That’s still more than what Central Falls did for its local pension funds in the same year, which was nothing. But other cities are paying their pension bills—Providence, Pawtucket, and Johnston all shelled out 80 percent or more of what was required to keep their local pension funds solvent in 2010 (not counting retiree health care).

At least in the near future, taxes for pensions are only expected to grow, with higher contribution rates for teachers set to kick in for fiscal 2013.

‘Fiscal collision course’

“What this is telling me is that the impact of the pensions that are being paid … consume such a large portion of the tax levy that they drive out dollars that could be used to improve municipal services and improve schools,” said Gary Sasse, former director of administration under Gov. Don Carcieri and longtime head of the Rhode Island Public Expenditure Council.

Rhode Island already has the fourth highest property tax burden in the nation, Sasse added. The increasing costs of local pension systems means that as homeowners and businesses pay more in taxes, they will get back less and less in services, he said.

“We’re on a collision course—a fiscal collision course,” Sasse said. If a quarter to a third of all new revenues supports the annual required contributions to retiree benefits, he said other services will be underfunded. “You have a pension system that is not affordable and certainly not sustainable in the long run,” he concluded.

Some cities and towns may turn to higher taxes in order to keep their pension funds solvent. But that might be worse than the alternatives. Bankruptcy, he added, has a negative stigma to it, but raising taxes could have real economic consequences by driving away investment and jobs. “Raising taxes may be a more serious economic problem than going into a well-ordered receivership or bankruptcy,” Sasse said.

 

Woonsocket: Higher taxes ‘inevitable’

One city headed for higher, pension-driven taxes is Woonsocket.

“We just don’t have the resources,” said city council president John Ward. “Our services have been cut substantially over the course of the last five or six years.”

The police force is down nearly ten officers and there are a dozen and a half fewer firefighters than there were five years ago. Overall, the municipal workforce has shrunk by a fourth of its size over the last decade. The highway and parks departments have been merged. Middle school sports have been eliminated and classroom sizes have been expanded in the elementary schools.

Other cities may debate closing public pools—but Woonsocket doesn’t even have any to shut down, Ward said.

“I just don’t know what else we have to cut,” Ward said.

He concluded that higher taxes are “inevitable.”

Officials announced earlier this week that Woonsocket schools have a $7 million deficit and are $4 million in arrears on their bills, the city could find itself sharing another unhappy distinction with Central Falls: municipal bankruptcy.

 

“We won’t take the state down with us if we fail, but we’re determined not to fail,” Ward said.

Ward lays some of the blame for all this at the feet of state officials. Woonsocket has lost millions in state aid over the last five years and the new funding formula implemented last year, does not restore what has been lost. State funding for Woonsocket education stood at $47.6 million in fall 2007. For this school year, it is $42.9 million, according to figures provided by Ward.

“They [state officials] just talk around us and act altruistic, when, in fact, they’re strangling us,” Ward said.

Cranston: City services could suffer

With 25 percent of its taxes owed to retiree obligations, Cranston may not be as bad as other cities, but the ratio of taxes to pension costs is still a concern, said Mayor Allan Fung. As those costs continue to grow, he said they will “squeeze” the dollars the city has available for services. He is especially concerned about what will happen when the city feels the full brunt of retiree health care costs. “You’re going to see it have an effect on services if these costs aren’t reined in now,” Fung said.

The most important step the state can take to help out cities like Cranston, Fung said, is legislation that would allow him and other administrators to suspend COLAs (cost of living adjustments).

In theory, the city could do that now, but Fung says it would be better to have state backing.

 

“What I was hoping to have was that enabling legislation, so it has more teeth when we’re challenged in court,” Fung said.

Pawtucket: special pension panel formed

Pawtucket has run up a pension tab that comes out to nearly half of its tax levy.

“The mayor certainly recognizes that the pension problem is a vexing one,” said Doug Hadden, spokesman for Mayor Don Grebien. “The numbers speak for themselves, but he’s being proactive about it.”

The collective bargaining agreements for the city fire and police unions expire this summer, giving the city a window of opportunity to make changes to retiree benefits, Hadden said. The city recently convened an ad hoc panel to study its options and among its members are some big names in the world of government finance in Rhode Island, including Sasse, and Ernie Almonte, the former state Auditor General and a member of a similar panel in Providence.

Narragansett: It’s not just the cities

It’s not just big cities that are struggling to pay their pension bills. The specter of unfunded liabilities is even rearing its head in places like Narragansett, where the cost of retiree obligations as a share of local taxes is the tenth highest in the state—ahead of East Providence and just behind Cranston.

“Unfortunately, because we don’t have it fully funded and … to meet the annual required contribution, what’s happening is that no new money is going into the pension fund,” said town manager Grady Miller.

But it’s certainly not for lack of trying.

Municipal employees now have to work for at least 25 years, instead of 20, before retiring. COLAs have been scaled back: cost of living adjustments stop compounding once a school retiree’s pension income hits between $35,000. For two workers the cut-off point is $45,000. School staff, town workers, and firefighters have also agreed to increased co-pays on retiree health care premiums and higher contribution rates to their pensions.

“We’re doing as much as we can in the collective bargaining area,” Miller said.

And yet, the town still isn’t hitting its annual required contribution.

The town has done its part too, Miller said. There was a time when the town contribution to its employee pensions dipped down to 6 percent. But in recent years, the town has ramped that up by 2 percent each year. In 2011, when the rate hit 16 percent, Miller put the breaks on any further increases.

“I saw that we couldn’t sustain that,” said Miller, who became town manager two years ago.

 

Like so other communities, Narragansett is now looking to a special finance committee to hash out new solutions for its pension and retiree health care funds.

Warwick: State numbers ‘wrong’

With 30 percent of taxes going to pension costs, Warwick has the eighth highest burden in the state—at least, so says the Auditor General.

But Mayor Scott Avedisian begs to differ.

“We disagree strenuously with the findings of the Auditor General and … we think it does not explain the city at all,” Avedisian said.

Numbers his office provided show that the city owes less to its local pension funds than the state claims—a difference of about $25 million. That means that pensions would account for 18 percent of tax revenues. “For the second largest city, that would be very good,” Avedisian said.

The dispute is rooted in a disagreement over the time period used to calculate pension payments. Warwick is in year 18 of a 40-year amortization schedule for one of its pension funds—a schedule that was adopted when Governor Lincoln Chafee was Warwick Mayor. But the state is using a 30-year standard that has applied, causing the disparity in the estimates between the city and the state.

“Every year I have to call and say, ‘Tell me I have to re-amortize to a 30-year funding cycle. Order me to do it and I will,’” Avedisian said.

Otherwise, he said the state should change its report.

That very well could happen, the acting Auditor General, Dennis Hoyle, the acting Auditor General told GoLocalProv. But for now, he has not recommended any changes without knowing the outcome of the current statewide municipal pension reform effort. He’s also waiting on the Governmental Accounting Standards Board (GASB) to issue new standards for reporting pension and retiree health care liabilities in June.

“We’d like to look before we leap, basically,” Hoyle said.

Numbers exaggerated?

Despite the many worries and warnings issued by local officials, some suggest that the problem may be exaggerated.

“I think it’s kind of irresponsible to lump the pension payments with the OPEB [retiree health care]. The OPEB actuarial estimates are pretty much poppycock,” said Tom Sgouros, a progressive blogger and former candidate for state Treasurer. “That is, they predict the bankruptcy of this city or town or that one, but fail to note that if costs rise as much as they predict, we'll also be facing the collapse of American civilization under the weight of medical inflation, at which point OPEB costs will be the least of our concerns.”

Those estimates also widely on how far out into the future they project. The U.S. Postal Service, for example, plans ahead by 75 years and is already setting aside money for employees not yet born. “You can always make the OPEB ARC [annual required contribution] look bigger by increasing the horizon, and some people seem to enjoy doing that,” Sgouros said.

Hoyle agreed that some of the assumptions behind retiree health care liabilities are not as “tight” as the assumptions for pensions. For example, he questioned the assumed rate of return on funds that have accumulated little in assets—since it is only very recently that the Governmental Accounting Standards Board, which Rhode Island follows, mandated that municipalities start accounting for their retiree health care obligations in the same way that they do for pensions.

But he said the GASB standards aren’t nearly as extreme as the Post Office: they call for government employers to plan for OPEB costs over the next 30 years, which would account for the lifetime costs of current, not future, employees.

“I think it has relevance in reporting,” Hoyle said. “Clearly, it’s a significant number.”

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