Proposed Providence Pension Changes Could Cost City $4 Million
Tuesday, July 26, 2016
Mayor Jorge Elorza and the City of Providence could be tackling major pension decisions -- with major budgetary implications -- in the near future.
In its recent review, Segal Consulting notes that the city's pension system has averaged a 6.39% investment return rate over the last five years on an actuarial value basis, compared to the current assumption of 8.25%, prompting their proposal to lower the investment return assumption. Currently, the State of Rhode Island's State Investment Commission uses a 7.5% rate of return.
The initial draft report by Segal shows that the change would increase the total plan cost by as much as $4 million this year -- from $73,102,313 to $77,309,215 in Fiscal Year 2017.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTHowever, a set of alternative plans provided by Segal show a number of options for the city to address costs associated with the lower rate of return (see below) -- but City Treasurer Jim Lombardi is advocating that the city go even lower.
"8 percent is still too high. I would like to see it at 7.5%," said Lombardi on Monday. "How you can accomplish that to reamortize the payment schedule to 30 years whereas it's currently on 24 year schedule. We could fund it immediately and not even have it phased in." The city did not respond to request for comment on Monday.
Consultant Proposals Show Range of Options
The forty page "Actuarial Experience Review" by Segal Consulting for July 1, 2013 through June 30, 2015 for the Employment Retirement System of the City of Providence was provided to the city this spring, who is expected to address the proposals, and their decision on how to proceed, in the near future.
The Providence Retirement Board meets on Wednesday but the report and proposed changes are not on the agenda.
While the preliminary new funding schedule in the draft report shows an immediate phase-in of the new rate of return, four alternatives were provided by Segal to the city for ways to phase it in, with recommended investment return and mortality assumptions. The following plans, and their short term impact -- were submitted to the city for review.
* Plan 2a - "Impact First Reflected in FY 2018 Plan Cost." The FY17 plan cost would be $73,217,543, and $80,187,734 in FY18. The cost would be $83,029,035 in FY19.
* Plan 2b - "Impact Phased-In Over Two Years Beginning with FY18 Plan Cost." The FY17 plan cost would be $72,217,543, and $78,123,118 in FY18. The cost would be $83,357,357 in FY19.
* Plan 2c - "Impact Phased-In Over Two Years Beginning with FY17 Plan Cost." The FY17 plan cost would be $75,287,546, and $79,993,018 in FY18. The cost would be $82,877,964 in FY19.
* Plan 2d - "Impact Reflected Evenly Over Schedule Beginning with FY18 Plan Cost." The FY17 plan cost could be $73,217,543, andd $76,212,652 in FY18. The cost would be $79,345,492 in FY19.
Pension Critic Riley -- "Providence Should Be at 5%"
Providence pension critic Michael Riley said Monday he would peg the rate of return lower --- much lower.
In a recent piece, "Providence in Big Trouble," Riley reported that Providence pension plan assets ended fiscal year 2016 at $246 million in cash and investments, writing, "Coincidentally the $246 million marks the lowest level of assets at fiscal year-end since 2007."
Segal, in their actuarial experience report, states that the FY16 "actuarial" value of assets was $353 million. Riley has written repeatedly the claim that the assets are artificially inflated.
"5% and they can't, which is my point," said Riley of how much he'd lower the return investment to. "Warren Buffett would say 5.5% for a funded plan. Lower for Providence -- current annuities price at about 4.5%
"The national authority is Josh Rauh at Stanford University," continued Riley "It very much makes a difference whether the pension is reasonably funded. GASB 67 & 68 give guidance [through the] Government Accounting Standards Board. The worse finding ratio, the lower the discount rate. That's one reason a politician would lie about funded ratio.”
Riley weighed in with his thoughts on reamortization.
“Reamortizing without reforming contracts is equivalent to theft of future generations. It is disgusting but Providence won't or can't renegotiate public worker contracts without receivership,” said Riley. “A big part of state reform was a reamortization. To a purist like me that is effectively a default. It’s what they do in Greece and Argentina.”
Related Slideshow: Providence’s Most Endangered Properties - 2016
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