The Worst Funded Pension Plans in RI
Tuesday, June 14, 2011
The unfunded liabilities for local city and town pension funds have soared to $7.6 billion—exceeding the state-only share of the unfunded liability, which is $3.7 billion, according to new data obtained by GoLocalProv.
Now, the total unfunded liability for both state and local systems stands at $11.3 billion, an increase of $2 billion from just one year ago.
The new numbers underscore the need for pension reform not only at the state level, but across cities and towns, said General Treasurer Gina Raimondo, who has warned that the looming pension debt is one of the single greatest threats to the recovery of the state economy.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“It is clear that Rhode Island faces steep challenges in meeting retirement benefits,” Raimondo told GoLocalProv. “As state Treasurer, my responsibility is to find solutions for the state-administered pension system. I am in frequent contact with mayors and city and town managers over the challenges they are facing. As the state works towards comprehensive pension system reform, I am hopeful that the solutions we find may be applicable to city and town systems as well.”
Top ten worst funded pension systems
A GoLocalProv analysis of data compiled by the Rhode Island Public Expenditure Council shows that the top ten worst funded pension systems are some of the most fiscally stressed communities in Rhode Island.
Topping the list is Central Falls, which is under state-appointed receivership and has a retirement system that is nearly 80 percent unfunded. Providence and Pawtucket, both facing their own fiscal crises, rank third and sixth respectively. (Click here to view the chart.)
In terms of total unfunded pension liability, Providence has the highest amount, at $828 million, followed by $290 million for Cranston and $236 million for Warwick.
Even those pension liabilities could be understated, according to John Simmons, executive director of the Rhode Island Public Expenditure Council, which compiled the data. Simmons said that none of the communities RIPEC surveyed had recently done any studies that tested the validity of their assumptions about mortality or rate of return on investment.
Cities and towns have done an even worse job of saving up for the other health insurance and dental benefits, technically known as Other Post Employment Benefits, or OPEB—which for years has been the dark horse of retirement debt. In fact, it wasn’t until 2006 that the Government Accounting Standards Board recommended that local governments start accounting for these other retirement benefits.
So far, just ten out of the 39 cities and towns in Rhode Island have saved anything for the other retirement benefits. As of 2010, the unfunded liability for those benefits alone stood at $3.9 billion.
Economist: Unfunded liabilities ‘a chronic disease’
Economists tell GoLocalProv that the unfunded local pension liabilities—combined with the state liabilities—will have a widespread impact on the state economy. “The massive local and state unfunded pension liabilities is a chronic disease with major short-term economic implications,” said Edinaldo Tebaldi, an economist at Bryant University.
The pension debt could have a domino effect on the economy—triggering yet another downgrading of the state’s bond outlook, which, in turn, would increase the cost of borrowing money to invest in state or local infrastructure, Tebaldi said. Businesses will become even more nervous about investing out of fear of higher taxes, and, if those higher taxes become a reality, individual payers will have less money to spend on basic consumer goods.
“Therefore, the unfunded pension liability problem that afflicts Rhode Island discourages investment, reduces economic activity and contributes to slow down the already slow economic recovery,” Tebaldi said. “Bold policy changes should be implemented immediately as a way to reduce uncertainties and minimize the negative effects of the ‘pension mess’ on Rhode Island's fragile economy.”
University of Rhode Island economist Leonard Lardaro agrees that the rising pension liabilities could further slow down the economy. “Rhode Island and the nation’s economies are slowing down, so if there are more things we have to pay for and divert from consumption and spending, that is going to make the slowdown longer and possibly more severe,” Lardaro said.
All this makes for bad news for homeowners. “My guess is that property taxes will be going up for several years,” Lardaro said.
How did pension liabilities get so big?
Circumstances vary from city to city. Some, like Providence and Johnston, have suspected cases of widespread pension abuse. At one point in Providence, 8 out of every 10 retiring police officers and firefighters earned a tax-free disability pension combined with a compounded cost of living adjustment of 5 or 6 percent.
As for Johnston, a GoLocalProv investigative series has uncovered that the town has many as two dozen firefighter pensions that are so high that they violate state law.
Joe Rodio, an attorney for the town, said the miscalculation of benefits over a 25 to 35-year span is the single biggest factor behind an unfunded retirement liability as high as $324 million, when health care and the other retirement benefits are included. “Johnston is unique because you have a class of people who are collecting disability pensions and they may not be entitled to them,” Rodio said.
Other communities, like Central Falls and West Warwick, simply do not have the broad kind of tax base necessary to support their pension systems. “We’re predominantly a blue collar community. We don’t have a large manufacturing-retail tax base,” said West Warwick Town Manager James Thomas. “So when the economy turns south it affects our tax base.”
In Pawtucket, the problem is clear: pensions for police and firefighters account for the lion’s share of the city’s unfunded liability, according to data provided by the Finance Department. The total pension liability for the city is $166 million, and of that amount, $130 million stems from the retirement plans for police and fire, according to the data.
But the city also did not carry its fair share for years. Not only did the city fail to make its annual required contribution for years, but it actually reduced its contribution in order to offset its annual budget deficits, according to the Pawtucket Finance Department.
In 2010, 17 cities and towns failed to pay all of their required pension contributions, according to RIPEC. In some cases, communities have not been able to afford to keep up with the rising costs, Simmons said.
Almost everyone seems to agree on at least one thing: past political leaders made the problem worse by passing the buck down to their successors. “We have the same problem as the state has. We keep kicking the can down the road hoping that somebody else fixes the problem,” said Thomas.
Town official: Not sticking our head in the sand
“We are definitely not sticking our head in the sand, but unfortunately for 90 plus years it’s what they did and it’s just gotten to a point now where you’ve got to stand up and say, ‘What are we going to do?’” Thomas added.
In West Warwick, there are several answers to that question. He said the town is raising the minimum retirement age for police officers and firefighters to 50 and is asking them to contribute to their health care in retirement. The town has also raised employee contributions to their pensions from 6 percent to 9 percent.
One thing the town is not doing, Thomas said, is high taxes. He pointed to nearby communities like North Providence and Coventry, which raised $14 million and $9 million more, respectively in local taxes, than West Warwick. “We’re not taxing people into the Stone Age, unlike some other communities,” Thomas said.
In Pawtucket, Tony Pires, the fiscal adviser to Mayor Don Grebien, said the city needs to consider some of the same kinds of reforms that Raimondo is proposing at the state level—limits on COLAs, raising the retirement age, and changing the accrual rate of a worker’s pension benefit. “All of these things as far as the city is concerned are going to be on the table,” Pires said.
So far, Providence Mayor Angel Taveras has yet to come out with a detailed pension reform plan—but he hasn’t lost sight of the issue, according to spokesman David Ortiz. “We’re very focused right now on producing a balanced budget for the upcoming fiscal year and stabilizing the city’s finances,” Ortiz said. “Pension reform is a high priority for Mayor Taveras and is something that the administration will be focusing on significantly in the coming months.”
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