Providence Pension Projection Data Raising Questions
Monday, May 20, 2013
As the Providence City Council's Ways and Means Committee has been holding hearings on Mayor Taveras' fiscal year 2014 budget proposal, the health of the City's pension fund continues to come under close examination -- and scrutiny of its unfunded liability assumptions.
While the City recently lowered its projected rate of return from 8.5 to 8.25 percent, it is still significantly higher than the state's recently adjusted rate of return of 7.5 percent, which when lowered in 2011 saw a dramatic increase in the unfunded liability which General Treasurer Gina Raimondo addressed in comprehensive pension reform measures.
In light of the significant municipal pension fund concerns, the state required in 2012 that cities and towns with pension funding ratios of less than 60 percent to submit "Funding Improvement Plans" with projections both at their current actuarial rate of return level, as well as a half a percentage point below, for comparison.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTRegarding the numbers reported, a source involved with pension funds in the state told GoLocal, "I was surprised to see the projected unfunded liability level increases to be at the levels shown, especially in light of what occurred with the drop in interest rate at the state level. The fact that projected municipal unfunded liabilities didn't appear to go up that much at all [on a half a percentage point decrease] surprised me."
"An additional lowering of fifty basis points (as required by the state to be reported) would be expected to be much higher, I would think," the source continued. "It's based on actuarial assumptions, which I can't speculate on, but that did stand out to me."
Last week, in a segment on BondBuyer.com entitled, "Why Moody's Changed Pension Analysis," Tim Blake with Moody's, which provides credit ratings for its investor clients, said, "The accounting and reporting of pensions in the government sector is very different than the private sector. It's not standardized, and we believe it under reports liabilities for the balance sheet perspective."
State Reporting Shows Similarities, Discrepancies Among Municipalities
In the Funding Improvement Plans required by the state in 2012 from municipalities with funding ratios of less than 60 percent, the FIP for Providence -- as well as a number of other municipalities -- showed only modest increases in unfunded liability projections with a lower rate of return assumption.
A look at the City of Providence's FIP, or "Critical Status Emergence Plan," shows that prior to making pension fund improvements, the City's unfunded pension liability would have been over $925M for FY13, and over $937M for FY14.
With a rate of return of 8.25 percent, along with COLA freezes and other measures taken to increase funding of the pension system, the unfunded pension liability for FY13 was reported to be $739M, and projected to be $749M for FY14.
As required by the state, a look at a reduction in the rate of return from 8.25% to 7.75% saw an increase of unfunded liability to $742M for FY13, and $754M for FY15, by comparison.
Other municipalities reported significant changes in unfunded pension liability in light of reducing their interest rate assumption, however.
The actuarial valuation for its police pension fund provided by Bristol to the state in November 2012 indicated a drop in interest rate assumption from 8% to 6.75%, and the net impact of the assumed changes, which included other factors besides the rate of return change, was an "increase in the unfunded accrued liability of $4.2 million" -- on previously unfunded liability of only $9.25 million.
With the rate of return decrease of 1.25%, the increase of nearly 45% in unfunded liability would correlate to roughly 9% per quarter percent. By comparison, if the City of Providence were to decrease its rate of return by another half a percent based on these assumptions, a correlating 18% increase in unfunded pension liability would be over $133 million.
In its Funding Improvement Plan, however, Bristol showed that for the police pension fund, a further drop of a half a percentage point in rate of return, as required for analysis, would only yield an increase in FY13 of unfunded liability from $14.25 million -- to $14.3 million.
Bloomberg Contributor Critical of RI Municipal Pension Structure
In an article on Bloomberg.com on February 8, 2013 entitled, "Why Municipal Pensions are a Terrible Idea," contributor Josh Barrow wrote, "Pension systems are complicated, and overseeing them properly takes time and expertise. This is a heavy lift for municipalities overseeing small pension plans".
Citing states total unfunded municipal pension liability as being currently at more than $2.3 billion for 36 municipalities, he writes, "This lack of attention has meant that local plans are much more likely than statewide plans to have become deeply underfunded."
Barro advocates for closing municipal pension plans having one system for municipal workers to be overseen by state government, citing Rhode Island's improvement of its funding ratio from 48 to 61 percent with recent reforms.
"The biggest challenge with closing local pension systems is one of fairness: making sure that it doesn't become an opportunity for irresponsible towns and cities that underfunded their pension plans for decades to dump their liabilities into a statewide pool. In some places, municipal officials and unions might also resist the loss of local autonomy, but in Rhode Island they would likely be grateful to have a problem off their hands," wrote Barro.
City Council Moving Forward With Assumptions
Providence City Councilman Luis Aponte said he thought that that the City's proposed ARC for FY2014 of $62 million was in line with the most recent projections available, as part of the recent settlement that the city fund the amount required at at least 90%.
"We're confident that this number is accurate in light of current assumptions," said Aponte. "My hope is that we'll continue to move forward to get the fund up to where it needs to be."
Aponte did acknowledge however that a new actuary could change assumptions -- and that the City has narrowed down a list of potential actuaries to three, after firing its previous actuary, Buck, earlier in the year for miscalculations.
"We're hoping that the number still holds true," said Aponte. "We won't know until we get a new actuary if this is an accurate number."
The City Council will be holding a public hearing on the budget this coming Wednesday.
