An upcoming meeting of the Warwick City Council’s finance committee on Wednesday, Oct. 2 at 6 p.m. will become the center stage for an ongoing discussion (or debate, depending on who you ask) regarding the financial health of the city.
Last week’s actuarial reports on pension and other post-employment benefits (OPEB, meaning costs associated with paying retiree healthcare for city and school employees) renewed with vigor a topic that has more layers of complex nuance than can fit within any one newspaper article – and the disparity between those on one side of the spectrum regarding the severity of Warwick’s financial plight from the other is significant.
On the far end of one side there are people like Rob Cote, the outspoken Ward 7 resident who for years hasn’t shied away from being a thorn in the city administration and city council’s side on everything from DPW employee benefits to fire trucks left idling during runs to Stop & Shop.
On Tuesday evening Cote – in accordance with the recently convened Warwick Financial Crisis Committee – presided over a public information session at the Warwick Public Library to go over a five-year outlook prepared by Marcum LLP at the behest of the City Council earlier this summer. That report was supposed to be heard in a special council meeting in previous months, but has been pushed off multiple times, which prompted Cote to release the report on his own.
“This affects young families that are considering moving into Warwick and older families that are considering moving out of Warwick,” he said to a full audience at the first session of about 75 people. “It affects all of us.”
Cote reiterated data that came out from last week’s actuarial reports, which revealed that – just on the city side, not counting the school department – the city as of June 30, 2018 has accrued liabilities for just OPEB of about $352 million. That means if the city were to set aside funds to pay off that overall liability in 20 years, it would require an approximately $35 million allotment each year just to fund the city’s healthcare obligations to current employees, retirees and future retirees. For context, the city can raise only about $8 million property tax revenue with a maximum 4 percent tax increase allowable by law.
Some, like Cote and City Council President Steve Merolla, have taken issue with the accuracy of this actuarial projection, contending that their formula includes a calculation that assumes the city is earning 3 percent on investments set aside to fund OPEB – when in reality the city has zero dollars set aside for OPEB and is paying healthcare costs on an annual, pay as you go basis.
If you were to remove that 3 percent calculation, the obligation immediately rises $90 million to around $442 million. Add the school’s projected $52 million in OPEB and they contend the total OPEB liability actually sits at around a half billion dollars.
This philosophy has, in turn, been challenged by Mayor Solomon’s administration – in particular Michael D’Amico, a financial consultant who was brought in by Solomon over the summer and is working for the city on a part-time basis. He argues the actuarial formula includes that provision to account for future inflation, and that the $352 million – while not perfect, and speculative by its design – is more accurate and financially honest, while Cote and Merolla’s stance takes on a more pessimistic view.
Regardless of the back and forth, the overall liability – when lumped in with the city’s pension liability of around $332 million – looms as a troubling number that, to those who say the city is in the midst or at least the beginning stages of a crisis, demonstrates clear writing on the wall.
“We’re in a situation where we didn’t get here overnight,” Cote said. “This was gradual and this situation has proliferated from catastrophic decision failures on the part of the City Council, historically. Successful councils and successful cities don’t have a half a billion debt just on healthcare and another $350 million in debt on pensions. That’s not successful business planning.”
Cote argues that lucrative benefits packages for city employees – with provisions such as lifetime healthcare with no co-pays, healthcare transferring to spouses upon the death of retirees and compounded cost of living adjustments (COLAs) for retirees of the fire department – are the root cause of the debt, and need to be addressed immediately.
“We cannot afford it. Don’t get me wrong. You and I did not negotiate these ridiculous contracts, but we’re obligated to them,” he said. “The point is I am tired of hearing that the city worker deserves this or the city worker deserves that. The city worker deserves only what the community can afford. And we can afford no more. It’s at that point.”
Diving into the five-year report, Cote discussed how it indicates the city is in “red” – or severe – condition when it comes to the “change in overall financial condition of governmental activities,” which takes into consideration things like long-term obligations and the depreciation of city capital investments.
The report also shows the city’s liabilities have far exceeded its assets in the past five years – which is made visible by new accounting standards put forth by the federal government which now requires cities and towns to report the full breadth of their pension and healthcare liabilities.
That change has been dramatic in terms of illustrating the long-term debts of municipalities. For example, prior to the GASB 68 reporting standard which necessitated the full reporting of pension liability, the cumulative deficiency of long-term debt reported by Warwick sat at $64.8 million. After that reporting became mandatory, it jumped to $401.4 million. With the newest update that came in 2017 – which requires the OPEB liability be fully reported – the overall cumulative deficiency for 2018 as reported by Marcum sits at $730.3 million.
The report does have green (positive) and yellow (nearing severe) indicators for Warwick as well. For example, the city’s unassigned fund balance sits at the low end of the recommended range, with the city’s balance of $22.6 million in “rainy day fund” money amounting to about 8.6 percent of the city’s overall expenditures. The report recommends having 8-16 percent in this balance.
Also in the green is the city’s debt in regards to bonds, which is hovering around 2.5 percent of the general fund expenditures as of 2018. However, the OPEB and pension liabilities earned a red and yellow/red rating from Marcum respectively – and they cite the actuary’s recommendation of $35 million a year to fund this liability as an indicator of that financially unhealthy fact.
Another important point to note from the report is that they assume a maximum 4 percent tax increase ach of the next five years, and general fund expenditures growing between 3.17 and 4.2 percent each of the next five years, when historically they have been between 1.5 and 2.5 percent. Without funding OPEB, the report indicates Warwick will face a deficit of $760,056 in FY21; a $765,793 gap in FY22; a $1.44 million gap in FY23; a $2.63 million gap in FY24 and a $425,752 deficit in FY25 due to the relief of capital bond obligations.
“There is no solution here,” Cote said, adding that he sees the only way out of the situation is through receivership. “This is simple mathematics.”
Mayor Joseph Solomon does not see things the same way as Rob Cote – to put it lightly.
“There are some people who interpret things differently. I see the same term used by a select few – it’s one word – I don’t even repeat it because I think it’s nonsense,” he said during an interview on Wednesday. “We’re not in a crisis.”
Solomon believes that indicators, such as the city’s AA bond rating being upheld by Standard & Poor’s (S&P) earlier this month, and the reports from actuaries and the city’s auditing firm of BlumShapiro indicate something else entirely.
“As far as I’m concerned, I’m very happy with the actuaries, with the S&P bond report, BlumShapiro’s auditing report, the information provided by my finance director – I’m very happy with the current condition of the city and the direction of the city,” he said. “All that information seems to show and tell me that Warwick is on the right track – a positive track – and we’re going to continue on that track.”
Solomon sees the long-term OPEB liability discussion as one that lacks proper context. In states like New York, he mentioned, setting aside money to go into a trust dedicated solely for OPEB liabilities is against the law. He states that he was the one who first proposed putting healthcare for public employees out to the bidding process in 2010, which he said has saved “double digit millions” over the years since.
Solomon cited numbers ran by D’Amico, which showed that over the last several years, healthcare costs in Warwick have increased by an average of around 4 percent. While he doesn’t see this as indicative of a looming financial disaster, Solomon said that the healthcare system as a whole will need to be reexamined.
“Healthcare is also changing, and not just in the city of Warwick but in the state of Rhode Island and on a national level,” he said. “And it has to change. Because healthcare itself is unsustainable going up. We look to other countries and their healthcare systems – you’re going to see a change in healthcare and the approach to the receiving of healthcare.”
While Solomon said he didn’t want to “negotiate through the Beacon” when asked if he would consider adjusting current employee and retiree benefits packages to address the root cause of these liabilities, he did say it was his intent on making things more sustainable by way of “design” through future contracts.
“I think every employee understands that. Whether it be municipal, police or fire, I think everyone is trying to work together to head in that direction of mitigating. It doesn’t benefit anyone in the long run if what you’re promised cannot be delivered,” he said. “I firmly believe that, when you were hired here 10, 15 or 20 years ago and you were promised something, you can’t change the rules. But I think on a going forward basis, by design, you can make things sustainable and you can mitigate the projections.”
Solomon suggested the possibility of adding another tier to the pension system for newly hired employees, one where the contributions required would be different, the time at which a pension could be drawn from would be changed and the length of employment required would be altered.
“All of these things will significantly reduce what the current day snapshot is. What you’re getting right now is a snapshot of what is today,” he said. “We’re not unique. This is all over. I’m not just going to cry ‘Woe is me.’ I’m going to be proactive in working to make it better… That snapshot today is not going to be the picture tomorrow. I’m not of the belief that the picture tomorrow is going to be worse than the snapshot today.”
A good litmus test to gauge Solomon’s dedication to enacting change by way of contractual design could come in the form of the fire department collective bargaining agreement going forward, which has remained unresolved.
While not fully embracing the need for receivership at this point in time as Cote has, Council President Steve Merolla has no misconceptions that the city is in the midst of a dire financial crossroads – where inaction will eventually, inevitably, lead to disaster.
“Don’t just listen to members of the public, don’t just listen to Steve Merolla, listen to the actuary who wrote the report,” he said, referencing Edward Echeverria, senior actuary at Danziger & Markhoff LLP, who presented the city’s OPEB liability report last week and said: “I agree that these [healthcare] plans are not sustainable, and yours is no exception.”
Merolla confirmed the scheduling of the meeting on Oct. 2 to go over Marcum’s report, which will be open to the public for discussion. He said the goal of the meeting should be to find an area agreement among the varying levels of concern regarding the city’s finances.
“So, to me, this meeting hopefully will have everyone reach a consensus of where we are now, so that we can have the debate as to how to fix where we're going,” he said. “Because if it's not sustainable, you have to implement changes. To me, that's been part of the problem for years now. Which is everyone's interpretation of the urgency of the situation.”
Further, Merolla hopes the meeting will bring about consensus in terms of what initial steps can be taken to address the problems at hand. He mentioned changes being made to new hires’ healthcare and pension benefits as being a ripe area for compromise and agreement.
“If you're an employee, I would be screaming fund it [the OPEB and pension obligations], and if you're a taxpayer, you say at a minimum that you can't afford this for any new employees and you have to look at the structure going forward,” he said.
But in terms of whether or not the financial situation of the city warrants a crisis – Merolla sits firmly on one end of the spectrum.
“This will bring the ship down. This philosophy that the titanic was unsinkable is absolutely wrong,” he said. “I'm wondering what the urgency is, today, to fix it. It's a win, win for everybody to fix it.”