Providence - Half of Taxes Pay for Retiree Benefits

Wednesday, June 15, 2011

Stephen Beale, GoLocalProv News Editor

 

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Just over half of all taxes collected in Providence in 2010 were owed to pensions and benefits for all city retirees—sucking money away from basic services and adding to the property tax burden, according to new data obtained by GoLocalProv.

The data shows that Providence levied $294 million in taxes for the year. It owed $148 million to its pension plans and retiree health care—equal to 50.6 percent of the money the city raised in taxes, according to data compiled by the Rhode Island Public Expenditure Council.

Providence had one of the highest pension tax burdens in the state, coming in third behind Woonsocket and Central Falls, which owed 52.4 percent and 60.3 percent of their tax levies to retiree pensions and benefits in 2010. (Click here to view the full chart.)

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“It’s an extremely serious problem and it’s really the worst of both worlds,” said Gary Sasse, a former director of the state Department of Administration and current fiscal adviser to the city council. “Because the unfunded liability exists, it threatens the credit worthiness of the city and if the city moves to address it, it’s putting an additional property tax burden on the taxpayers.”

The data indicates the amount of taxes owed to retiree pensions and benefits is sharply on the rise. In the prior year, Providence owed just 39.3 percent of its tax levy to retirement costs.

Sasse said the city is between a rock and a hard place: either it risks a downgrading of its credit rating, affecting its ability to borrow money to make improvements, or it raises taxes, lowering the quality of life for residents.

Pension payments cut into vital services

Even with higher taxes, essential services are threatened, said Sasse. “What you’re doing is you’re paying higher taxes for the sins of the past and these take away from essential services,” Sasse said.

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“This is what we call crowding out—crowding out the services taxpayers receive,” said John Simmons, Executive Director of RIPEC.

Simmons pointed to the total amount owed in 2010, which was $148 million. Reducing that just by 10 percent would save nearly $15 million—more than the combined $12 million the city is seeking to carve out of the fire and police budgets. In the case of the police, the city is turning to layoffs of 80 officers as a last resort, in the face of stalled negotiations over concessions. Unions officials have warned the moved would have a significant impact on public safety.

With a lower pension payment, Simmons said the city wouldn’t have to make such deep cuts in the fire and police departments.

The rising costs so far have exceeded the ability—or the willingness of city officials—to pay them. As a result, Providence paid most of what it owed to its pension systems in 2010, but barely more than two-thirds of what it should have towards retiree health care. In all, the city actually paid $106 million towards retiree costs—equal to 36 percent of its tax levy.

Tax rate increase this year: 13 percent

“When we’re talking about a $1.2 billion liability it’s clear that the city council and the mayor have to work together to get this right for the retirement security of current and future retirees,” said city Councilman David Salvatore. “It’s unfair to the Providence taxpayers that they have to pay for these generous pensions—specifically generous disability pensions and benefits—while the city government is forced to go to the taxpayers to increase the tax levy on an annual basis.”

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The proposed budget for 2012 would raise the levy by as much as 5.25 percent—one percent above the cap, a move that takes a supermajority vote of the city council. That, in turn, will result in a 13 percent increase in the city tax rate.

“The bottom line is taxpayers can’t afford what the city doesn’t have any more and our current pension system is unsustainable,” Salvatore said.

Simmons warns that the problem simply can’t be solved with “slight changes.”

Instead, he said the city has to do the same thing the state—specifically, General Treasurer Gina Raimondo—is doing: take a hard look at what is driving up the costs of the system. Simmons, who is a former Director of Administration for the city, said officials should pay close attention to the accrual rate for benefits, COLAs, and disability pensions.

So far, Providence Mayor Angel Taveras has not come out with a comprehensive pension reform package, although his administration maintains it remains a top priority that will be addressed once a balanced budget has been passed. In the meantime, the city is backing key legislation at the state level that would help rein in some of the costs.

One bill would allow the city to shift medical coverage for retirees onto Medicare at the age of 65, saving an estimated $11.6 million. The city is also counting on receiving $4.6 million from the Governor Lincoln Chafee’s MAST program—which rewards communities that fully fund their pensions with added state aid.

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