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Warwick Facing Pension Meltdown

Saturday, November 26, 2011

 

Just like scores of other communities across Rhode Island, if you live in Warwick, you’ve seen a steady increase in property taxes every year over the last ten years—more often than not, by the maximum allowed by law. But a GoLocalProv review of reports shows Warwick’s tax increases went, almost exclusively, to increases in the costs of benefits to city employees—not to increases in services or infrastructure.

To be more precise, 92.5-percent of all new revenue went to pensions, healthcare, salaries, sick pay bonuses, and longevity. The remaining 7.25-percent went to services and infrastructure.

In the year 2004, the City of Warwick spent $30.3 million in employee benefits. This year, the city is budgeted to spend $47.9 million. That’s a 58-percent increase in the cost of employee benefits (pension, health care, dental, unpaid sick days, etc.) over 8 years—a steady hike of 7-percent every year. By comparison, the city spent $6.6 million on social services in 2004. This year, the city is budgeted to spend less than it did 8-years ago—$6.4 million.

And all the data suggests this number is only going to increase absent significant reforms.

40 Percent of Taxes Goes to Pensions

Although the City of Warwick generally makes its Annual Required Contributions to its pension plans, it spends the most on pensions as a percentage of its total budget. Roughly 40-percent of all city taxpayer dollars go to pensions and (OPEB) (Warwick has an unfunded health care liability of $258 million according to a recent auditor general’s report). And that doesn’t even take into account the city’s unfunded health care liability, which according to a recent Auditor General’s report, tops $300 million.

When Warwick Mayor Scott Avedisian sent a plan he called “pension reform” to the City Council earlier this year, it was a public relations success. Newspapers and blogs heralded it. But when one got past the headlines, it became apparent that the savings were, at best, miniscule, and that absent property tax increases so far as the eye can see, Warwick will need significantly more reform.

If the pension reform proposed by General Treasurer Gina Raimondo, enacted by the state legislature, and signed by Governor Lincoln Chafee can be compared to a marathon for its size, scope, and ambition, the city of Warwick’s pension reform can more easily be compared to a walk from the couch to the refrigerator (and perhaps back).

Unlike the state reform plan, which suspended automatic raises for retirees, moved current employees into a hybrid style 401-k plan, and increased the retirement age for state workers and teacher, the Mayor’s pension reform plan, slightly increased contributions, but for new hires only. And, he consistently pointed out that it, saved $8 million in the future. Perhaps, but “the future” is a pretty vague term.

In fact, Avedisian, 47-years-old, will be far into retirement by the time the city realizes $8 million in savings. According to actuarial reports, Warwick will not save $8 million (in one fiscal year) until 2049. Avedisian will be 85-years-old.

Only Slight Savings

By the year 2049, thanks to the pension reforms, the city will have saved roughly $114 million (a 38-year period). But the city will have spent $1.175 billion to keep the pension plans afloat.

To put things in perspective by the year 2027, the city will be spending $50.3 million in taxpayer dollars to fund the municipal pension plans. Absent the Avedisian pension reforms, the city would have to spend $52 million.

In 2016, the city will save roughly $141,000 thanks to pension. However, over that same time-period, the city’s annual required contribution (ARC) will also increase by $7.2 million. In sum, the savings referenced are merely a slight decrease in known future expenses.

Taken in sum, the most current actuarial reports data made public on the status of Warwick’s four municipal pension plans, shows the city pension plans were funded at 57-percent. But the data from the city’s most troubled plan, the Police and Fire I plan, is taken from June 30, 2008, months before the stock market crash.

City Denied Request for Actuarial Info

Perhaps more importantly, that data is based on a rate of return on the pension fund of 8-percent, and uses life expectancy tables for the Police and Fire pension plans—which is funded at just 27-percent (even with the scarily outdated life expectancy charts). When Raimondo and the State Retirement Board, updated their mortality tables, the taxpayer contributions for the state pension plan ballooned by almost 40-percent—a major catalyst for pension reform.

In April of this year, long before pension reform was debated on the state level, City Councilman Steve Merolla asked for updated analysis of the city’s unfunded liability, based on updated mortality tables, salary increases, and a lower rate of return on investment. Before the full City Council, the city’s actuaries (GRS, same as the state’s), told Merolla that they didn’t feel comfortable preparing that information, because it was only the request of a single councilman, who didn’t have the authority to expend city funds. (It would have cost the city money, to do the required actuarial work.)

On a day when the mayors from Rhode Island’s other large cities testified before the House and Senate combined finance committees about the need for major municipal pension reform, Avedisian seemed to downplay the situation in Warwick. Avedisian told the committee that the city had adopted updated life expectancy charts, as well as lowered the expected rate of return on the pension fund to match the 7.5-percent expected by the state and that the city’s plans were in decent shape.

However, peculiarly Avedisian cited the same liabilities that were determined based on the older assumptions. But as Raimondo showed with the state fund, updating those assumptions increases the unfunded liability—and by no small amount (millions and millions of dollars). A Warwick resident, who follows the cost of legacy benefits closely, contacted the city clerk and asked for the information to back up Avedisian’s testimony.

Here is the response the resident was given:

“No formal correspondence (such as a formal letter) was sent ton GRS requesting incorporating the new state assumptions into our plans. The city has not received new public safety valuation reports. They are being updated at the present time,” the city clerk wrote in an email on November 7.

Chafee’s Role

In any event, Governor Chafee has been an outspoken advocate for municipal pension reform. But several of the issues in Warwick, can be directly traced to his administration. For instance, the Police and Fire I plan, which is dangerously underfunded and acts an as albatross to Warwick’s other pension plans is currently funded on a 40-year schedule. This was implemented in 1995—when Lincoln Chafee was Mayor of Warwick. Government Accounting Standards Board (GASB) standards, which are federal guidelines that municipalities are supposed to adopt, and are solidified in state law, (General Law 45-10-15) say that a plan should not be funded over a period shorter than 30-years.

In a letter to Avedisian, dated October 4, 2011, Dennis Hoyle, the state’s Auditor General, and state revenue director Rosemary Galoogly made him aware that the city is not in compliance with state law.

“Management’s plan should include a timetable towards achieving and maintaining 100% funding of the pension cost on an annual basis. We have received a copy of the valuation completed as of July 1, 2009. If a more recent actuarial valuation…has been completed, please forward a copy…along with management’s plan for funding the plan,” said Hoyle.

In a letter back, Avedisian said that he had made the state aware of the pension plan’s situation and that it would cost significantly more to meet the 30-year amortization rate.

“In other to comply with (GASB) Statement 27, the City of Warwick would be required to increase it’ contribution by more than $6.5 million annually,” Avedisian wrote.

The city is already spending amongst the highest percentage of total budget on pensions in the state.

Editor's Note: The source for the information above was former Ward 1 Councilman Robert Cushman. The Mayor's office says Mr. Cushman's numbers are incorrect.

 

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