Memo: Providence Budget Deficit is 50% Larger than Administration Claims
Tuesday, August 07, 2012
Providence’s internal auditor believes the city’s year-end operating deficit is about $6 million more than the Taveras administration has claimed, according to a memo sent to members of the City Council last week.
In the memo, internal auditor Matthew Clarkin explains that he believes the figure is closer to $17.9 million than the $11.9 million figure the administration reported to the state Department of Revenue on July 25. Neither projection includes the city’s plan to underfund its annual required contribution to the pension system by $10 million, a decision city officials defend because of the landmark pension reform agreement reached with retirees earlier this year.
Early Retirement Reimbursement Program (ERRP), $425,000 from workers compensation and $870,000 from encumbrances.
“Both branches of our local government have made hard but necessary decisions,” said City Councilman David Salvatore. “While we are all pleased with the significant progress that has been made, we must continue to keep our eye on the ball and address our budget shortfalls and the challenges this new fiscal year will present.”
A More Transparent Process
Those challenges include what still appears to be a “$25-$30 million structural problem,” according to Gary Sasse, the former head of the Rhode Island Public Expenditure Council (RIPEC) and a consultant with the City Council.
Sasse praised the administration for taking a more transparent approach to addressing the city’s financial troubles, but pointed to decisions to underfund the pension contribution by $10 million as well as some one-time fixes such as transferring money from the Civic Center fund as examples of where the city fell short.
Mayor Taveras’ first two years in office have been dominated by the need to reduce the $110 million structural deficit he inherited upon taking office in January 2011. Since then, the administration has been forced to close schools and cut spending across most city departments while also reaching agreements with the major nonprofits to increase payments in lieu of taxes and the retirees.
“The process was much more transparent,” Sasse said. “It looks to me like the internal auditor picked up on a few things the administration didn’t.”
Cash Shortage Could Trigger Insolvency
The pension reform deal, which earned the support of the majority of the city’s police and fire retirees, is considered one of the key steps the city took to avoid filing for bankruptcy, which Taveras threatened earlier this year.
The plan freezes cost-of-living-adjustments for retirees (COLAs) for ten years, eliminates five and six percent compounded COLAs, places a cap on pensions and moves retirees over the age of 65 onto Medicare. The city projects the pension reform savings will cut its unfunded liability by $170 million.
While city officials are no longer talking bankruptcy, some City Council members say the 2013 fiscal year, which began on July 1, will still be a difficult year for city finances. Councilman Sam Zurier said both the administration and the Council will need to monitor spending to make sure the city avoids cash-flow problems.
“Because the city does not have any cash reserves, it is important for the administration and the City Council to watch closely any revenue shortfalls or cost overruns,” Zurier said. “Even with the progress the city made over the past 18 months in improving its fiscal position, a cash shortage could trigger insolvency.”
Searching for More Cost Cutting
Zurier and Salvatore, two members of the Council Finance committee, say they have each looked at ways to help the city continue to save money moving forward.
Zurier introduced and ordinance last year to enhance revenues by tying the homestead exemption to a requirement to register automobiles in the city and the plan saved the city millions.
“After residents reapplied for the homestead exemption under the new rules, the administration calculated that the current year’s real estate property tax would increase by $6 million without raising the tax rate,” Zurier said. “In addition, the state has reported to the administration that since the new rules went into effect, there has been a surge of additional automobile registrations in the city.”
Salvatore has recently called for an audit of the city’s pharmacy benefit management (PBM) agreements, a proposal he believes could help the city save between nine and 16 percent on its prescription drugs costs.
“While many difficult choices and necessary sacrifices have already been made, we must continue to directly address our City's major cost drivers,” he said. “Recently I have proposed an independent review of the City's prescription benefits in addition to the savings that have already been identified surrounding pensions. These and similar reform measures are needed to protect basic levels of City services.”
Both Councilmen agree that while the budget deficit they inherited was significant, the actual opportunities for finding savings have been much more limited. Zurier noted that half of the budget is comprised of state school aid and the city’s municipal appropriate for education, which cannot be reduced under state law.
Similarly, other portions of the budget are considered untouchable due to federal grant restrictions, debt service and other limitations. Zurier said the city’s already high tax burden makes it difficult for quick fixes on the revenue said as well.
“The city’s progress to date is a basis for optimism, but there is no doubt that closing the last $10-$20 million of the gap will be more difficult than it was to close the first $10-$20 million of the $110 million deficit identified last year,” he said.
The Taveras administration declined to comment for this story.