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Providence Retiree Health Liability - $1.1 Billion Is 90 Percent Unfunded

Friday, February 21, 2014


Providence owes more than $1.1 billion in retiree health care and other post-employment benefits and has continued to underfund the system by millions each year under the administration of Mayor Angel Taveras, city documents show.

The fund for other post-employment benefits, known as OPEB, is now 90 percent unfunded, meaning the system had few, if any assets, as of July 2012, according to the new city annual financial report filed for the 2013 fiscal year. That puts the OPEB fund in markedly worse shape the pension fund, which has an official unfunded liability of $831.5 million and is 31.3 percent funded. (See below slides for the key numbers.)

“The two liabilities together are over 2.5 billion. Providence can’t pay it under any scenario,” said Mike Riley, a local investment manager who ran for Congress in 2012 and is a GoLocalProv columnist.

City governments the size of Providence did have to report their OPEB liabilities until fiscal year 2008, when a new accounting rule took effect. Since then, Providence has consistently underfunded its system. In fiscal year 2011, the annual required contribution—the amount the city should have put in—was $63.9 million. The amount the city actually contributed was $30 million. The next year—the first full fiscal year Taveras was in office—the city should have contributed $73.8 million but it only came up with $33.8 million. A spokesman for Taveras did not respond to a request for comment.

Notably, the new figures already take into account savings from the city’s recent pension reform, including a plan to move eligible retirees and their spouses onto Medicare, according to the latest actuarial report produced for OPEB benefits, dated December 2012.

The unfunded liability is doubling the annual cost of the system. As of July 2011, the normal cost for OPEB would have been $28.9 million. But the city owes extra every year to pay down the unfunded liability. Those extra payments roughly double the annual cost. The additional cost for that year was $42.6 million. The combined additional cost and normal cost roughly add up to the annual required contribution.

When Taveras took office, the additional debt Providence had built up for retiree health and other benefits since the new accounting rule took effect was $63.9 million. Two years later—by the end of the 2012 fiscal year—it had more than doubled to $138.6 million, according to the latest available valuation report from the city’s former actuary, Buck Consultants.

As of July 1, 2011, the fund had $1.2 million in assets, with an assumed rate of return of 4 percent, far lower than the 8.25 percent for the pension fund. The 2013 financial report does not list any assets as of July 1, 2012, although the system is still listed as 10 percent funded by that date.

“As with pensions, Providence made generous OPEB promises to its employees. Decades of elected officials signed or affirmed those promises but did very little to ensure that they can be fulfilled. This represents a serious disservice to those employees. As with pensions, we have to ask: how will these promises be kept?” said Monique Chartier, spokeswoman for the Rhode Island Taxpayers organization.

As with pensions, the unfunded liability is being addressed through amortization. The city is on a 30-year amortization schedule, but, unlike pensions, there is no end date. Instead, the amortization period is “open basis,” meaning that the amounts owed each year are recalculated every time the city conducts an actuarial valuation and then the 30-year period begins anew. The last valuation was July 2011. A new report is scheduled to be released later this spring.

Chartier says one option for handling the escalating costs should be off the table: raising taxes. “On Monday, USA Today pegged Providence’s tax burden for a family of three at sixth highest out of fifty one cities—higher even than Boston and New York. This is a well-timed reminder that hiking taxes as a solution is simply out of the question,” she said.

“The unfunded accrued actuarial liability is 448 percent of the City of Providence’s payroll. We’re broke. The current tax base cannot afford this debt. Enough said!” added Lisa Blais, spokeswoman for OSTPA, in an e-mail.

A crisis in city finances or health care costs?

But some say the crisis, if there is one, has been misunderstood and misrepresented.

One progressive policy expert, Tom Sgouros, says the real issue is not underfunding by Providence—or any other city, for that matter—but the spiraling cost of health care. He said the focus should be on reforming and reining in rising health care costs, a problem which he says is not limited to local governments, but affects large corporations and households as well.

“The standard way to forecast the OPEB crisis involves predictions that cannot possibly come true. Medical inflation rates as high as we’ve had in the last 20 years are not sustainable over the next 50, but that’s what these reports assume,” Sgouros said.

“If medical inflation is as high over the next 50 years as these reports predict, every company in America will be paying more for health care than for salaries. Health costs will consume over half the state budget and over 20 cents of every dollar spent in America. Paying health care costs for retirees will be the least of our problems,” Sgouros added.

Sgouros says the new health care law has “begun to address the problem.” He says the rate of medical inflation has “slowed abruptly enough to discount all the OPEB report projections.”

“Much more will need to be done to tame this beast, but cutting costs and squeezing out unsustainable profiteering is where we need to begin, not denying people life-saving care,” Sgouros concluded. “To imagine this is a problem of cities not putting away enough money is absurd, and any solution that involves taking health care away from people is equally absurd.”

Mayoral candidates speak out

The latest figures sparked a variety of reactions from the five major candidates running to succeed Taveras, who has announced his candidacy for Governor.

Lorne Adrain seized on the numbers to warn that “politics” has overtaken “responsible policy-making: “The latest available valuation report for OPEB, which shows a dangerously low funding ratio of 10 percent and an unfunded liability of over $1 billion confirms that for too long politics have undermined responsible financial policy making. It’s clear that strong leadership is needed to protect retirees and taxpayers and to put the city on a path toward financial health and integrity.”

Jorge Elorza, like Sgouros, sees hope in the Affordable Care Act. Nonetheless he says the city must continue to work to save more money in health care costs.

“As Mayor, I will use my experience as an accountant to look for the responsible solutions we need to ensure we can fulfill our commitments to both our retirees and our children. These numbers should serve as a reminder to us that our nation is going to have to work hard to find cost savings in health care,” Elorza said. “We have promised health care to our retirees, a commitment that must be honored. Health care, after all, is a basic human right.”

Michael Solomon, who is also the city council president, emphasized the savings the city has realized from moving retirees into Medicare. Solomon said he hopes to see the effects of the change in the next valuation report on OPEB benefits, scheduled to be released in mid-March.

“In the first year of our term, the City Council conducted a comprehensive overview of our benefit structure. We found age-old problems that demanded immediate fixing. Working together, we were able to put our pension and benefit plan on a sustainable path to recovery. This problem was not created overnight, and it will take continuous monitoring and direct action in order to protect beneficiaries and taxpayers,” Solomon added.

Brett Smiley said his approach to the unfunded pension liability would be the same as pensions—stressing the need for “growing our economy by investing in our strengths and supporting our business community.” Smiley said he has the “practical experience” to “hit the ground running” and strengthen city finances.

The sole GOP candidate in the race, Dan Harrop, sounded a decidedly more pessimistic note. “The pension reform has really not accomplished enough: yes, it gave us some fiction that we had breathing room for a few years to see what happens, but the really issue is that the pension fund is so pitifully funded that only much more drastic reforms are needed: whether you look at best projections or worst projections, there is no plan to make up the unfunded liability,” Harrop said, referring both to the pension fund and the fund for other retiree benefits.

Stephen Beale can be reached at [email protected]. Follow him on Twitter @bealenews


Related Slideshow: Providence Retiree Benefits Debt

New documents show that Providence’s fund for retiree health benefits—even after taking into account the savings from pension reform—is critically underfunded. Technically, these benefits are known as Other Post-Employment Benefits, or, more commonly, OPEB. The below slides break out the key numbers, including the total unfunded liability and how it compares with the pension fund. The slides also provide a brief “OPEB 101” overview, with key background information on these benefits and how accounting for them has changed in recent years. Figures are taken from the latest available city financial report, for 2013, and the latest valuation of the health care fund, released in December 2012.

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Unfunded Liability in 2012

Total Liability: $1.19 billion

Actuarial Assets: none listed in 2012 report

Unfunded Liability: $1.19 billion

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Unfunded Liability in 2010

Total Liability: $1.21 billion

Actuarial Assets: $1 million

Unfunded Liability: $1.21 billion

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Percent Funded in 2012

Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.

Funding ratio in 2012: 10%

Percent unfunded in 2012: 90%

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Percent Funded in 2010

Funding Ratio: The ratio of the amount of

actuarial assets to the amount owed.

Funding ratio in 2010: 9%

Percent unfunded in 2010: 91%

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Rate of Return

Assumed rate of return: 4%

Current rate of return for pensions: 8.25%

Former assumed rate of return for pensions: 8.50%

*All rates net of investment expenses

“Current funding practice has virtually all benefits provided directly out of the general assets of the City. Higher interest rate assumptions would be available if the City were to make substantial pre-funding contributions to the assets of the plan.”

—Buck Consultants, former city actuary

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Retiree Benefits Cost to City (2012)

Annual Required Contribution (ARC) for 2012: $73.8 million

Actual Contribution in 2012: $33.8 million

Shortfall: $40 million

Net OPEB Obligation Start of Year: $98.4 million

Net OPEB Obligation End of Year: $138.6 million

Net OPEB Obligation: Here this figure represents the gap between the amount that should be contribution and what is actually contributed. 

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Retiree Benefits Cost to City (2010)

Annual Required Contribution (ARC) for 2010: $79.5 million

Actual Contribution in 2010: $28.7 million

Shortfall: $59.8 million

Net OPEB Obligation Start of Year: $13 million

Net OPEB Obligation End of Year: $63.9 million

Net OPEB Obligation: Here this figure represents the gap between the amount that should be contribution and what is actually contributed.

Photo: Flickr/Doug Kerr

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Annual Cost of Retiree Benefits

Normal Annual Cost: $28.9 million

Additional Cost Because of Shortfall: $42.6 million

Total Annual Cost: $73.8 million

Time to Pay off Debt: 30 years

Note: Total Annual Cost also includes $2.2 million in ‘Interest Cost.’ 

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Number of City Workers in Plan

General City Workers: 3,915

School Workers: 4,487

Water Department Workers: 338

Total: 8,740

Note: Includes active city workers and workers who are no longer employed by the city.

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Retiree Benefits - Individuals

Monthly Medical Premiums

General City Workers: $615.14

Police: $789.63

Fire: $792.97

School: $801.26

Average: $749.75

Note: Rates shown are identified as the ‘classic’ rates in the Dec. 2012 actuarial valuation report. 

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Retiree Benefits – Families

Monthly Medical Premiums

General City Workers: $1,533.23

Police: $2,036.08

Fire: $2,043.69

School: $2,069.55

Average: $1,920.63

Note: Rates shown are identified as the ‘classic’ rates in the Dec. 2012 actuarial valuation report. 

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OPEB 101

What are Other Post-Employment Benefits (OPEB)?

Other post-employment benefits (OPEB) are employee benefits other than pensions that are received after employment ends. OPEB can include the following post-employment items:

  • Medical benefits
  • Dental benefits
  • Vision benefits
  • Prescription medicine benefits
  • Hearing benefits
  • Disability benefits, if not part of a pension plan
  • Long-term health care benefits, if not part of a pension plan
  • Life insurance, if provided separately from a pension plan
  • Other health benefits, if not part of a pension plan


Source: Adapted from the Office of the State Controller, New York.

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How did cities and states used to account for OPEB?

Before 2004, local and state governments typically followed a “pay-as-you-go” accounting approach in which the cost of benefits is not reported until after employees retire. However, this approach is not comprehensive—only revealing a limited amount of data and failing to account for costs and obligations incurred as governments receive employee services each year for which they have promised future benefit payments in exchange.

Source: Adapted from the Government Accounting Standards Board.

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How has accounting for OPEB changed?

In June 2004, the Government Accounting Standards Board adopted a new rule governing OPEB accounting, known as Statement 45. This rule requires that local and state governments report, for the first time, annual OPEB costs and their unfunded actuarial accrued liabilities for past service costs. The rule, according to GASB, is meant to foster improved accountability and a better foundation for informed policy decisions about the level and types of benefits provided and potential methods of financing those benefits.

The Government Accounting Standards Board (GASB) is a national body that sets the standards for governmental accounting and reporting. Generally, these are accounting standards that state and local governments use.

Source: Adapted from the Office of the State Controller, New York, and the Government Accounting Standards Board.

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How has the new rule been implemented?

Local and state governments were allowed to apply Statement 45 prospectively. At the beginning of the year of implementation, nearly all governments started with zero financial-statement liability. From that point forward, a government accumulated a liability called the net OPEB obligation, if and to the extent its actual OPEB contributions are less than its annual OPEB cost, or expense. The net OPEB obligation (not the same as the Unfunded Actuarial Liability) will increase rapidly over time if, for example, a government’s OPEB financing policy is pay-as- you-go, and the amounts paid for current premiums are much less than the annual OPEB cost.

Source: Adapted from the Government Accounting Standards Board.

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When did governments have to be compliant with the new rule?

Timeline: The new rules were phased in over three years, according to the below schedule.

■ Government entities with $100 million+ in revenues: Had to comply with GASB 45 starting with the fiscal year that began after December 15, 2006.

■ Government entities with revenues between $10 million and $100 million: Had to comply starting with the fiscal year that began after December 15, 2007.

■ Government entities with revenues under $10 million: Had to comply starting with the fiscal year beginning after December 15, 2008.

Source: Adapted from the Office of the State Controller, New York.


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