Pension costs going up, but law could help
With the New Year, City Finance Director Ernest Zmyslinski is thinking of the 2012-13 budget and if there’s one certainty, it’s that the city will need to allocate more taxpayer dollars to fund pensions.
How much, is the question.
In the current year, $23,062,539 is allocated to pension payments for the city’s four major plans, representing about 20 percent of the $116 million budget. Of that total, $10.8 million goes to funding the Fire I and $2.7 million to the Police I pension plan. That plan has been closed and represents, according to the last actuarial study completed two years ago, a $210 million unfunded liability.
In 1995, the city embarked on a 40-year plan to make the plan actuarially sound, which it has faithfully followed with annual payments since then. However, those payments are expected to increase as actuaries lower investment income projections from 8 to 7.5 percent and adjust mortality tables.
The administration went ahead with those changes when General Treasurer Gina Raimondo recommended consistent pension assumptions for state and municipal plans. How these changes will affect public safety plans will be defined in the actuarial report currently being completed.
Whatever actions are taken at the state level could impact city pension payments. Pension reforms approved by the General Assembly in November and signed into law by Gov. Lincoln Chafee avert what could have been a $5.5 million increase next year in teacher pension payments by the Warwick School Department and may actually ease payments, now at a 13.2 percent contribution rate, for next year.
In spite of Chafee’s efforts to include municipal pensions in state reforms, most particularly giving cities and towns the power to suspend cost of living adjustments [COLAs], those provisions were not part of the bill principally drafted by Raimondo. A critical distinction between state and municipal pension plans is that state benefits are legislated and those of municipal plans are defined by contract negotiations. Should municipalities gain the power to alter previously contracted benefits and that stands up to a court challenge, it could dramatically alter pension costs going forward. In place of a COLA, Fire and Police I pension benefits are based on current rank pay. Therefore, for example, a retired fire captain receives the same benefit increase as the pay increase won in negotiations by an active captain.
Costs for the next fiscal year will hinge in part on police and fire contract negotiations. All three of the city’s employee contracts expire July 1 and, according to pension reforms advanced by the administration and approved by the City Council last year, alter years of service and pension benefits of newly hired employees after that point.
Fire and Police Plans II have a built-in 3 percent COLA, but active members share in any actuarial projected increases resulting from reduced investment projections and other changes in assumptions. The city pays two-thirds of those increases with the balance covered by active members in the plan. As for increased retirement benefits, the city’s municipal employees plan, however, is dependent upon the action of the city’s retirement board. Because of the decline in investment returns, the board did not award an increase this year and is not expected to next year.
Just the differing benefits and provisions of Warwick’s plans illustrate the complexity of developing statewide provisions for all cities and towns.
“We’ll be trying to craft something that takes in all the nuances from all the different plans,” Mayor Scott Avedisian said Friday of a meeting Chafee will hold today with mayors to discuss pension legislation.
The meeting is not restricted to pensions. In preparation, Avedisian has asked department heads to compile a list of state mandates and what they cost the city to assess whether requirements might be scaled back or eliminated.
The picture projected of local governments in a report released Dec. 19 by Moody’s Investors Service would indicate that Warwick is in a better position to cope with the economic weakness, revenue stagnation and growth in pension costs than most municipalities. The report finds that “there is a higher probability that Rhode Island will experience a double-dip recession than for most other states, which portents continued declines in most sources of local government revenues.” Moody’s ranks that probability at 59 percent behind Wyoming that is ranked at a 67 percent likelihood of recession in the next six months.
While Moody’s downgraded Warwick bonds from Aa2 to Aa3 last year, the rating does not carry a negative outlook, as do many municipalities.
“We’re still in the high quality,” Zmyslinski notes. The only city to have a higher rating is Newport.
Having reviewed the Moody’s report, Zmyslinski further notes that Warwick is not cited for special attention, as are Central Falls, Providence, Woonsocket and East Providence. Also, the report does not list Warwick among those municipalities experiencing severe declines in assessed values. In addition to the previously mentioned cities and towns with 10 percent or more declines in assessed values are Coventry, Cranston, North Providence and East Greenwich.
“We’re strained,” says Zmyslinski. “Are we in the category of other municipalities? I believe not.”
The Moody’s report mentions that local revenue growth has been exacerbated by cuts in state aid to local governments. That is a factor that both the mayor and Zmyslinski say has been ignored by critics of local property tax increases and elimination of all but $500 of the $6,000 motor vehicle exemption to balance the current budget. That action, projected to generate an added $8 million in revenue, spawned the Car Tax Revolt and was the impetus to change the method of motor vehicle valuations that is the subject of legislation introduced by Rep. Joseph McNamara.
The state had been reimbursing the city for the exemption, but former Gov. Donald Carcieri started phasing that out, and in the past several years, reductions in state aid and the reimbursements have resulted in more than $20 million in cuts.
“When you look at the report,” Zmyslinski says, “the problem is with the old [pension] plans.” Funding those plans, such as Fire and Police I that represent $210 million of the city’s projected $250 million in unfunded pension liability, is problematic.
“The question is what do you do about them?” Zmyslinski said.
Some answers, which can only mean reduced benefits or controls on increased benefits going forward, may come out of the General Assembly this year. In the meantime, Warwick is following a plan, albeit one that will cost more than $13 million a year, to have the plan funded by 2035.
With other municipalities in far dire straights, legislators may take steps that will also lessen the load on Warwick taxpayers in the years to come. And this does not even take into account other post-employment benefits (OPEB) such as health care expenses. The Moody’s report puts the unfunded OPEB liability for Rhode Island municipalities at $3.5 billion.
The city isn’t building reserves to deal with these costs.
“It’s pay as you go, “says Zmyslinski. He further notes the uncertainty of universal health care and how that could impact city costs. Union contracts could also impact the future cost of health care costs for retirees, for example, if they were to include retiree co-payments.
Overall, however, Zmyslinski sees Warwick in a better position than many municipalities.
Exactly where the city is financially will come into focus with the city audit as of June 30, 2011. The city has requested a two-month extension of the Auditor General to complete the audit, which was due Dec. 31. Zmyslinski said the extension is needed to give Braver PC of Providence, the low bidder, time to finish the audit “that has become increasingly more difficult.”
By that time, he expects the actuarial report on the public safety plan to also be completed.