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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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Comments:

Odd Job

Post Rd. looks like the aftermath of an allied bombing run. Tons of boarded up business fronts, just a depressing looking city.
The higher the taxes the less we get in return, all to keep the union labor scam humming along on well-oiled tracks!

John McGrath

Is Rhode Island capable of self-government? Or does it need to be annexed by some foolish state?

Pam Thomas

Meanwhile, the city council is wasting more money trying to extend the 10-year fight against extending the runway, even though a longer runway would help both Warwick businesses and the state. Makes no sense. The lack of vision in RI is sad.

Chris Digman

Before we extend the runway the politions need to deal with the issue of people having a reason to come to RI. You can create lots on construction jobs and pay everyone working on a project and all the politions can get their picture taken infront of the new construction and when it is over we have spent a massive amount of money and created temp jobs with no real benifit. People from out of state with money to invest and business ideas looking for some place to locate are not going to choose RI because we have a new long runway. They will come here if we make reforms to the current laws for unions, lower our tax rate, and take a second look at the regulations for business and factories. Give employees the
right to keep their job if they dont want to join a union, keep the good environmental regulations and cut out the ones that just hold up projects and cost millions, stop taxing businesses and citizens to death so we can fund stupid pensions or people on welfair. Things in RI have gotten so far out of balance in RI the only way to fix it is to look at all the laws and regulations, not just pension and health care.

Gary Arnold

A couple of things, the airport has nothing to do with instate people, the expansion is for more out of state travelers not residents of RI.
Here we have Chafee at the center of the Warwick problem and he is now the whole states problem.
Our political leaders, if you want to call them that, are at best clueless on how to manage any financial dealings.
We need receivership to have a future and we need to hold the politicians feet the the fire for their misdeeds.

John McGrath

@Gary Arnold. Yes, the airport is primarily for the use of out of state people. But its expansion is supposed to benefit financially the people of Rhode Island by attracting more tourist spending and more convention spending and provide more tax revenue. Rhode Island would be in an even sorrier state without the spending of out-of-staters within the state. Out-of-state spending in Rhode Island is one of the only mechanism for growth in Rhode Island's economy and in RI job growth. In addition, any companies looking at Rhode Island for location would very much want a good, convenient airport. That's Chaffee's case. Be fair in presenting it.

Yes, the airport alone will not attract businesses. But it is important. Using it, however, as substitute for doing other necessary things is dysfunctional, but too easy for politicians to rest on.

john paycheck

if you look at the basic data comparing cranston to warwick....same size, same demographics, same populutation but trhe budget in warwick is like 25% more..makes you wonder why?

Pam Thomas

Businesspeople who travel a lot want to have an airport that has direct flights to the West Coast and internationally. If you're thinking of locating your business in RI, the fact that you'd have to make your way to inconvenient Logan to get a direct flight more than 2 hours away is just another strike against RI. That said, a city councilman from Warwick has an interesting op-ed in today's Providence Journal. The airport tends to leave Warwickians in limbo while making decisions too. Things need to move faster for the benefit of all.

Gary Arnold

@John McGrath and Pam Thomas, I agree the air port is important to those of us that still do business from RI or at least still live here and do business outside of RI. It in itself will not attract new business because it is not an operating expense such as the oppressive tax structure which is growing due to the continued mismanagement of RI.
The airport will not grow our tax base with new business that is required to build a foundation for new tax revenues. I am a business owner and can tell you that all efforts to locate to RI was an experience in futility due to the lack of planing and no vision for the health of the RI economy. The air travel didn't even hit our radar in our evaluations.




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