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Councilman Warns $1.2 Billion Pension Liability Could Get Worse

Tuesday, July 20, 2010

 

If Providence approves two proposed contracts with firefighters, its $1.2 billion pension liability could get even worse, according to the chairman of the city finance committee.

Councilman John Igliozzi, who chairs the committee, claims that the method for calculating Cost of Living Adjustments, or COLAs, in the contracts will bring the city back to the days when its pension system was abused and costs spiraled out of control. The president of the city union, however, maintains that the COLAs are consistent with the other contracts the city has had over the last decade.

One of the contracts is retroactive and covers 2007 to 2010. The other applies to 2011 to 2013.

In a report to the city council tonight, Igliozzi, who represents Ward 7, will sound the alarm over a $1.2 billion pension liability that is 70 percent unfunded, with only about $265 million available in assets.

He said the city pays about $60 million a year into the system, which costs $74 million.

In an ideal world, the interest from the money in the pension system would cover the difference, but the $265 million that is in the system now does not generate enough interest, so the city has to chip away at the principal, according to Igliozzi. He said the city’s pension system is one of the lowest funded ones in the country, according to Buck Consultants, a firm that is advising the finance committee.

New Contracts Could Make Matters Worse

Those costs will get only worse if the two new contracts are approved, according to Igliozzi. He says that’s because they use a system of calculating cost of living adjustments known as compound COLAs. Under that system, the COLA is multiplied by the amount the pensioner earned in the previous year, not the original amount, so how much he collects increases from year to year, according to James Lombardi, the internal auditor for the city. Over 20 years, he said the amount of the pension could double.

Lombardi estimates that the compound COLAs will add $10 million to the cost of the pension system.

“Adding them in there changes the whole dynamic of the contract negotiations and further debilitates the pension system,” Igliozzi said.

But Paul Doughty, president of Providence Firefighters Local 799, said the firefighters had found other ways to save money in the contracts. For example, this year they gave up a holiday, didn’t take their clothing allowance, and gave back a week of vacation. Also, effective this summer, firefighters can only retire after 23 years of service, instead of 20. Doughty said all the changes will save an estimated $16 million by 2013.

As for the compound COLAs, Doughty said they were consistent with the last seven contracts and last three settlements between the city and firefighters. “It’s kind of like Roe v. Wade,” Doughty said. “You may not like it. You may hate it. But the case law is very settled.”

Igliozzi said the COLAs brought the city back to the bad old days when pension costs were out of control. Doughty accused him of confusing the issue to incite voters. He agreed that the 5 to 6 percent COLA had been too generous in the early to mid-90s, but he said all firefighters are asking for in the current contract is a 3 percent COLA.

“It keeps up with the cost of living,” Doughty said. “We don’t think it’s overly generous with what the cost of living is.”

The two also disagreed about the legality of compound COLAs. Igliozzi cites a city ordinance that bans them, but Doughty said contract law supersedes local ordinances. Plus, he says if the city and the firefighters cannot agree on the new contracts, they would go back to arbitration—which has consistently sided with the firefighters on the COLAs.

Exactly how the city got itself into this mess was one area where the two agreed somewhat. Both blamed the high COLAs in the early 90s, and noted that the city exacerbated the problem by not making its annual contribution to the pension system from the mid-90s to the early 2000s. Igliozzi also said that the money in the pension system had been poorly invested in the early 90s.

The finance committee will make its presentation to the city council tonight at 5:30 p.m.

 

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