Providence Lowers Pension Forecast to 8% - City Treasurer Calls Move “Band-Aid on Shotgun Wound”
Thursday, December 01, 2016
The Treasurer for the City of Providence is blasting the Retirement Board's decision Wednesday to lower the city pension fund's assumed rate of return from 8.25% to 8%, saying it's a "band-aid on a shotgun wound."
"What I said today was, 8% is too high. Do I have an answer as to what it should be? No. But we need to look for a solution to bring it down. That's just unrealistic," said City Treasurer Jim Lombardi in an interview with GoLocal.
A report conducted by The Segal Group showed that in Fiscal Year 2015, the city's pension system was 28% funded with $354 million in assets and an unfunded liability of $894 million.
The firm then recommended that the city lower the assumed investment return to 8% and adjust mortality rates.
However, according to a memo from Internal Auditor Matt Clarkin, the 20-year expected rate of return for the city pension fund is actually 6.58%.
"I don't have anything negative to say about the vote or why the board voted that way," said Lombardi. "I did say that going from 8.25% to 8% is a good thing, but it's a band-aid on a shot gun blast to the chest. Is it helpful? Yes. But it's unrealistic that it will fix the problem."
"How do we deal with the unfunded liability when we give unrealistic rate of return? As Clarkin said, it's kicking the can down the road," said Lombardi. "As Treasurer I want to really address the problem. We need to get a realistic rate of return."
Prospect of Addressing Forecast
"The discussion today was based on we're doing this because of the budget -- I get that concern," said Lombardi, as the move to 8% will cost the city upwards of $4 million annually.
"I'm not looking to come in and say I'm going to harm the financial situation of the city, but we absolutely have a problem," said Lombardi.
In 2011, then-General Treasurer Gina Raimondo lowered the state pension system’s assumed return from 8.25% to 7.5%.
Lombardi noted that the possibility of revisiting the issue in the near future could prove difficult.
"The actuarial study is required once every three years -- and I believe that the board can only accept or reject the recommendations of the actuary," said Lombardi. "For us to lower the rate I believer there would need to be another experience study and presented to the board."
"My understanding if it was rejected today it would be sent to the council to determine. But the 8% was accepted," said Lombardi. "So when I say I don't have an answer, I do have some recommendations we can have conversations about it. There's no clear question about going go 7.5 or 7.25. You would need to reamortize. Is that the right thing to do? I don't know.
Related Slideshow: Providence Pension Liability
A new report shows that Providence’s pension fund—even after the recent reform—is still in trouble. The below slides break out the key numbers for the pension fund, including the unfunded liability, the assumed and actual rates of return, the current level of benefits, and how long it will take the city to pay off the unfunded liability. Figures are current as of July 1, 2013 and are taken from the new Jan. 31 actuarial report from Segal Consulting.
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