Unanswered: Can we afford it?
On Monday night, Ward 9 Councilman Steve Merolla wanted to know how taxpayers can possibly afford the projected health care costs of retirees, which he estimated at $400 million, on top of the unfunded liabilities of the city’s pension plans.
But the city’s actuary, Joseph Newton, who had flown in from Texas to appear before the State Pension Review Commission, didn’t venture any guesses.
“It’s not my job to tell you whether you can afford it or not. My job is to tell you what it costs,” he said.
Newton also told Merolla it’s not his job to project what it could cost the city to provide health care coverage to retirees before they go on Medicare. However, when it came to the cost of pensions and, in particular, the closed Police/Fire I plan that has been listed as in a “crisis” by the state, Newton had plenty of data.
The picture he projected is of a system that was underfunded in its early years, which means the city has a lot of catching up to do if it is to meet the benefits defined by the plan. The catching up started 17 years ago, when the city implemented a 40-year plan to fully fund the plan. This fiscal year, the city is paying $14.3 million into the plan. Next year, it increases to $14.8 million and it keeps going like that until 2022, at which point the annual taxpayer contribution is projected at more than $29 million. The plan is fully funded as of 2036.
That had Merolla alarmed.
Alluding to the state cap on raising the tax levy, Merolla asked, “Did you look at how much we can tax?”
Newton had considered this. He said that increases needed to meet pension requirements would be less than 3 percent.
Newton said if the city increased its payments to Police/Fire I by $600,000 a year for the next 23 years, “you’ll be all right.”
Mayor Scott Avedisian and Newton found a concerned and respectful audience, many of them city employees.
That hadn’t been expected going into the session. As Merolla had pushed for the actuary to come before the council, and the mayor had refused to sign resolutions to that effect, sparks were expected as council members questioned the assumptions that went into the actuary’s conclusion of 2011, that the plan faces a $242 million unfunded liability. The questions flew, but not the sparks.
A lot of debate focused on the terminology in mortality tables.
Newton used a white-collar table, with greater longevity, in his calculations, meaning the city would pay more because retirees are living longer, rather than the blue-collar table, with higher mortality rates.
This troubled Council President Donna Travis who noted that the city’s blue-collar workers are among the best. Ward 5 Councilman Edgar Ladouceur also questioned the difference between white- and blue-collar workers, noting that in testimony before the state commission Newton made the distinction that white-collar workers have college degrees. He pointed out that he doesn’t have a college degree and would that mean he is a blue-collar worker.
“Don’t get hung up on white-collar, blue-collar,” said Newton. He explained people live longer in this part of the country and to more accurately reflect that, the white-collar table was used.
As for the accuracy of the projected costs, Newton observed that when the 40-year plan was started in 1996, the unfunded liability of the plan was pegged at $246 million as of 2013. Now that it is 2013, it is $242 million. He sees no reason to change the outlook.
But changes have occurred that will impact the plan. The projected rate of return on investments was dropped from 8 to 7.5 percent, which will have the effect of increasing the unfunded liability. Conversely, as retiree benefits increases in the Police/Fire I plan are based on active police and fire raises, the assumption, at least for the next three years, doesn’t apply. Annual benefit increases of 3.75 percent were assumed. As police and fire won’t get pay raises in the next three years, the unfunded liability of the plan is expected to drop $20 million when recalculated this year.
“No pay raises is not a realistic approach down the line,” said Ward 4 Councilman Joseph Solomon. Solomon called for parties “to work together” and to be proactive rather than reactive.
Ward 8 Councilman Joseph Gallucci sought to defuse any anxiety of the many city workers who had come to hear Newton. He said he was born in Warwick, grew up in the city and would die here. And he reminded that the $242 million unfunded liability “is never due and payable today.”
But that didn’t pacify Merolla who remained focused on health care that he called “the largest unfunded liability.” He noted the city will also face other increased costs in the years ahead.
“At the end of the day, can we pay the bills?” he asked rhetorically. “Are we just pushing that crisis off to the future?”
The council will get another chance to question the actuary and review the numbers when Newton returns in another couple of months to present his report on the municipal plan as of 2012.