AUDIT: Providence Unfunded Retirement Costs Roughly $2.3 Billion
Wednesday, February 02, 2011
The total unfunded costs of Providence’s retirement system could be as high as $2.3 billion, according to the annual independent audit.
That figure includes the current $828 million unfunded pension liability, plus the unfunded liability for health care and other benefits for retirees, which was over $1.4 billion in 2009—the most recent year for which the data was available.
Only 34.06 percent of the city pension fund itself is funded—which is well below what would be considered healthy levels, according to Dennis Hoyle, the Acting Auditor General for Rhode Island. “Generally, people think it’s well funded if it’s 80 percent or more,” said Hoyle, who is a member of the Municipal Finances Review Panel for the city.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTA spokeswoman for Mayor Angel Taveras agreed. “The City’s unfunded pension liability is not sustainable. There is no easy fix for this issue, but the current administration understands well what we inherited,” said Melissa Withers. “The way forward is through hard work and deep collaboration among all the stakeholders. That’ll be no mean feat, but it is our starting point and we are going to go at it with all the resources we have.”
The president of the city firefighters’ union said members are concerned about the future of the pensions. In fact, last year, the union even sued the city to ensure that it was making payments into the fund.
“Firefighters are very concerned about their benefit. We don’t pay into Social Security, so we don’t have that benefit,” said Paul Doughty, President of the International Association of Fire Fighters, Local 799. “Our only pension is the city retirement we have.”
City falling behind on payments
As of June 2010, the pension system had unfunded liability of about $828,484,000—a figure that is 603.17 percent of what the city spent on payroll last year. The city can make up the difference if it keeps to a 22-year schedule of making its annual required contributions to the fund.
But, so far, it isn’t.
Instead, the audit shows that the city is chipping in less and less each year to the pension fund. In 2008, the city contributed 96.65 percent of what it should have to the system. In 2009 that dropped to 93.93 percent. In 2010, the contribution fell further to 90.29 percent, which comes out to $49 million.
$1.4 billion in additional retirement costs
And that’s only half the picture. The other half is a little-known and often overlooked category of costs known as “Other Post-Employment Benefits,” which mostly involves health care for retirees. Up until the mid-2000s, large cities did not even have to keep track of these benefits, until the Governmental Accounting Standards Board issued a new recommendation that they should be reported.
So far, Providence faces an even steeper unfunded liability for these so-called "post-employment benefits"—an estimated total of $1,497,451,000 in 2009, according to the audit. As of that year, the city had funded just 7 percent of the cost. To make matters worse, the city contributed just 76.86 percent of what it should have to the fund in 2010—down from 88.16 percent in 2008.
“They’re doing the same thing with the other post-employment benefits that they did with the pension fund—‘If you don’t look at it, it will go away,’” Doughty said. “Clearly if we’re going to have to pay the benefit, we’re going to have to pay the cost.”
In the meantime, Doughty said city firefighters are taking matters into their own hands. In their most recent contract, he said they agreed to pay 1.5 percent of their base salary into the fund for other post-employment benefits.
Unfunded liability nearly tripled
The unfunded liability for the additional retirement benefits nearly tripled in just a one-year span. In 2008, it was estimated at $592 million. The sharp increase is due to a big change in assumptions: previously, the city had assumed an 8.5 percent rate of return on investments. But the most recent audit now shows that has been revised down to 4 percent.
Joe Rodio, the chief legal counsel to the Fraternal Order of Police, Lodge No. 3, questioned the accuracy of the new estimates, claiming the numbers were manipulated to help the city gain concessions from the union during arbitration meetings over the new contract.
“Four percent is a deliberate understatement to manipulate the deficit to make it look higher ... when they go to arbitration,” Rodio said.
If the city pays its annual required contribution to the fund, it will take 28 years to catch up to the unfunded liability, according to the audit.
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