The Pension Burden: How Other RI Cities Are Dealing with It

Tuesday, July 27, 2010

 

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Four of the largest cities in Rhode Island face significantly underfunded pensions and have taken a variety of approaches to dealing with the problem.

In Providence, one factor driving pension costs higher has been 5 to 6 percent compounded cost of living increases, or COLAs, for a number of retiring firefighters and police officers.

Like Providence the four cities—Cranston, Newport, Pawtucket, and Warwick—have compounded COLAs, but they are closer to 3 percent and take less of a financial toll on the system, according to the finance directors in those cities.

Instead, those officials faulted past generations of local leaders for failing to make sure the city made its annual contributions to the system.

In Warwick, the old pension system for police and firefighters has a $279.3 million liability—more than $200 million of which is unfunded. “It looks bad on paper, but we’re paying it off,” said Oscar Shelton, the personnel director for the city.

Under that system, retirees receive a compounded cost of living increase which is equal to the annual raises that active employees get. But Shelton said that is not the main reason the system has such a gap in funding. Instead, he said it simply was not properly funded by the city until about 16 years ago, when Warwick committed to a 40-year schedule of annual payments that he said will make up the difference.

Since 1971, firefighters have been put on a different pension plan with a fixed, compounded COLA of 3 percent. Retiring police started going on a similar plan in 1992. Both of those plans are more than 80 percent funded, according to Shelton.

But he said the city needs to take additional steps to reform its pension system. He said his office will propose that the city council require that police offices and firefighters work 25 years, instead of 20, before retiring. He also will recommend that the city change the COLA system, so that in a given year it is either 3 percent or three-quarters of what the rate of inflation is—whichever is less.

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Newport: Pensions Took a Hit from Recession

In Newport, the city pension for firefighters has a liability of $78.9 million with $50.9 million that is unfunded. The situation is slightly better for police: a pension liability of $73.4 million with $35.6 that is unfunded.

Police officers and firefighters in Newport earn compounded COLAs that tend to hover around 3 percent, but that’s not the reason for the unfunded liabilities, according to city finance director Laura Sitrin. Instead, she said the recession was a major reason why the pension system was facing such a large unfunded liability. Like Warwick, Newport is on a 30-year payment plan that Sitrin said will close the funding gap.

Cranston Moves to 401(k)s

Of the cities, Cranston has taken the lead in reforming its pension system, according to Robin Schutt, the director of administration. This year, Mayor Allan Fung got the local Teamsters to agree to 401(k)s for new hires, which is a significant departure from traditional municipal pensions.

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Under the new plan, Schutt said the city makes regular contributions while workers are employed—but it does not guarantee how much of a retirement benefit they will receive in their retirement. “The Mayor sees this as the type of structural change we need to do down the road because the pensions are strangling us,” Schutt said.

As for its police officers and firefighters, they have been entering the state pension system since 1996. But the pension system the city offered retirees before that date has a $244.25 million liability with assets of only $43.4 million, according to Robert Strom, the city finance director.

Like Newport and Warwick, the retirees on that system benefited from a 3 percent compounded COLA, according to Strom. “They are based on the union contracts that we established years ago and we’re paying for it today,” Strom said.

But like his counterparts in other cities, he said COLAs were not the main force behind rising costs. Instead, he said that the city had not make its full contribution to the system, using some of the money to balance its budget.

In Pawtucket, the city pension system for police officers and firefighters has many of the same problems facing other cities. The system has a liability of $177.37 million and only $68.84 million in assets, according to finance director Ronald Wunschel. Like many of the other cities, retirees have their annual benefit increased by a 3 percent compounded COLA—and, like the other cities, Wunschel said the city in the past had not made the necessary annual contribution to keep enough money in the system.

He said Pawtucket is trying to correct the problem by more than doubling its annual contributions—from $4.1 million in 2009 to $9.6 million in the current year.

 
 

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