Mayor argues to hold course on pension plan
“Very comprehensive presentation,” were the words Rosemary Booth Gallogly, director of revenue for the state administration, used to describe the city’s appearance yesterday before the State Pension Review Commission.
But while the state may have an understanding of the city’s Police/Fire I pension plan that is classified as “critical,” Mayor Scott Avedisian remains focused on how that situation could be distorted by a group of “crazies” who have lumped the city’s funded pension liabilities with its long-term debt and after employment benefits to cast a picture of a municipality doomed to financial ruin.
The issue was expected to come up last night before the City Council, as the city’s actuary, Joseph P. Newton, answered questions about the city’s pension plans. Newton, a senior consultant at Gabriel Roeder Smith and Company of Irving, Texas, was in Rhode Island to assist with the city presentation to the state. As the council has requested to question the city’s actuary, Avedisian asked Newton to stay and address the council.
Roger Durand, who regularly attends council meetings and has questioned the administration on its debt, asked of the commission whether it would consider issuing a “taxpayer impact statement.” He also questioned projected rate of investment returns, pointing out that the bond rating agency Moody’s is considering a 5.5 percent rate of return on California bonds.
Durand also argues that pension payments are on a path of becoming a greater and greater percentage of the city’s operating budget and that other post employment benefits are being ignored.
From Newton’s perspective, three of the city’s pension plans are in good shape and the city has a plan in place to cope with its one problem plan – Police/Fire I – that is now closed and has about 400 retirees and 53 active members. As of 2011, the plan has an unfunded liability of $242 million.
“The funded ratios,” Newton said of the municipal plan and police and fire II plans in an interview following the commission presentation, “and they have the self-correcting mechanisms in them.”
Those three plans take into account market returns and adjust both any increases paid retirees and city and employee contributions accordingly.
No such mechanisms were put in place with Police/Fire I, although unlike many other municipal plans listed at “critical,” the plan does not have an automatic cost of living adjustment [COLA]. Instead, pension increases are linked to current pay increases of both the police and fire departments.
Further, 18 years ago the city implemented a 40-year plan, which it has adhered to, to meet the projected payments of the plan.
“I think they have been very proactive,” Newton said of the city. “They are way ahead of the time.”
“The 40-year plan has worked well so far. That won’t be the case if we change it,” Avedisian said following the committee meeting.
The state is looking for municipalities to adopt 30-year funding plans to meet standards, but the mayor says it would be “silly” for Warwick to take such an approach now since it would only add on eight years and millions in cost to the taxpayers.
In his formal remarks, Avedisian outlined how former Mayor Lincoln Chafee introduced an ordinance calling on the city to implement the plan in 1996.
The mayor told the committee that Newton has determined “that the most prudent course of action is to continue to comply with the city’s current Police/Fire I plan.”
Taking that course, the city will pay $14.8 million into the plan this year. That payment is based on assumptions that investment returns will yield 7.5 percent; that retiree benefits will increase annually by 3.75 percent based on raises given current police and fire and on a mortality rate based on white-collar college-educated retirees who live longer than blue-collar employees.
As the administration has negotiated no-wage increase 3-year contracts with police and fire, the unfunded liability of Police/Fire I will decrease.
However, while this bodes well for the city, the numbers have not been adjusted to reflect the change. That’s part of the strategy, as actuaries would not alter projections from month-to-month based on market performance.
“We don’t do knee jerk reactions,” Avedisian said, “to what’s happening in the market today.”
According to the 40-year plan, the city’s contribution will continue to grow annually by about 5 percent to a point where it will annually be paying about $30 million. As the growth in payments is expected to be in line with the growth in the budget, they will not become a greater and greater percentage of the budget as some fear, Newton said.
Because it is a closed plan, however, it will reach a point where it is fully funded and payment will drop off dramatically in the closing years of the plan.
That process promises to be speeded up with Avedisian’s promise yesterday that should the legislature approve Governor Chafee’s proposed budget and the $800,000 Warwick would get in pension assistance, the funds would augment, not substitute, city payment plans. This would reduce the unfunded liability of the plan.
“If we get extra money in, it should all go into the pension,” Avedisian said as he joined with reporters outside the commission hearing.
Responding to critics that the actuary is there to make the city administration look good, Mark Carruolo, the mayor’s chief of staff said, “We don’t tell Joe [Newton] what to do. Joe tells us what to do.”