By ETHAN HARTLEY If the City of Warwick were a family living on a $75,000 household income, it would have an ever-increasing credit card debt of about $240,000 - a gloomy fiscal reality that would prevent the family from addressing the issues presented
If the City of Warwick were a family living on a $75,000 household income, it would have an ever-increasing credit card debt of about $240,000 – a gloomy fiscal reality that would prevent the family from addressing the issues presented by their 20-year-old roof, 30-year-old boiler and aging car that shows 175,000 miles on the odometer.
At least that’s how Kyle Connors, assurance director from the Providence accounting firm Marcum LLP, attempted to simplify the complex financial situation that Warwick finds itself in during a long-awaited presentation of a five-year forecast at Warwick City Hall last Wednesday evening – the first of its kind since 2013, according to City Council President Steve Merolla.
“I don’t know if people in the public, in collective bargaining units, in government, agree on where we are,” Merolla said following Connors’ presentation. “Because we get a lot of mixed messages. If we don’t agree on numbers – because numbers don't lie...If we don't know where we are, we can't agree on what to do to get to the next step to make sure that these unsustainable debts don't get to the point where we can't pay them anymore.”
In real dollars, Marcum’s presentation outlined how Warwick can anticipate an approximately $12.8 million cumulative budget deficit over the next five years. However, that number was reached with a long list of assumptions, as any forecast must do.
The forecast assumes that the city will levy a maximum tax increase each of the next five years. This revenue is balanced against salary increases across the board of 2.75 percent, commodities increasing at 2 percent, various services increasing 2.5 percent and healthcare costs increasing 7.27 percent (a number that reflects the average increase seen in Warwick in the past five fiscal years). It also assumes that Warwick will not draw from its rainy day fund in four of the next five years.
Most importantly, however, the forecast essentially captures the city’s financial condition in a type of vacuum, where it assumes there will be no new capital expenses to pay off, no new programs or new expenditures over the next five years.
“We have a vanilla projection based on the assumption that no new programs or services will be developed in the next five years,” said former city councilman and school committee member Bob Cushman after the presentation. “We all know that's totally unrealistic.”
The $12.8 million cumulative deficit also does not factor in what the city’s position would be if it were to put money aside to pay for looming obligations associated with retiree healthcare (other post-employment benefits, or OPEB). Marcum reported that, were the city to hold itself accountable to those annually recommended contribution (ARC) suggestions for OPEB, the five-year deficit would actually be closer to $128 million.
Connors also briefly mentioned that the city’s reported $22.6 million rainy day fund may not be what it seems, as he spoke about uncovering a $7.2 million debt owed to the city within the water department’s enterprise fund. Connors further reported that the water enterprise fund currently has a negative net position, meaning, “If the [city] general fund said we needed $7.2 million, the water fund wouldn't be able to give it to them,” Connors said.
Connors made a point to emphasize that in regards to debt, it’s a tale of two cities in Warwick.
Utilizing the analogy of a credit card, Connors spoke about how Warwick’s long-term obligations for its pensions and OPEB costs are a major cause for concern.
While four of the five pension plans in the city are funded at 75 percent or better, the Police/Fire I pension plan hovers around 25 percent funded. And although the city is making the ARC on all its pension plans, this assumes that a rate of return on investment of assets for those plans will continue at 6.9 percent at the least.
“The ARC is being met, and provided the economy does well you'll make interest off assets, but a recession would certainly change that,” Connors said.
And while Warwick’s overall pension funding level of 54 percent is not as bad as some communities, Connors said the truly concerning factor is when you add in the context of the approximately $405.8 million in long-term OPEB liabilities between the school department and city collective bargaining units. All together, Warwick is facing nearly $860 million in long-term liabilities for OPEB and pensions.
As the city is paying its healthcare costs for retirees year to year – a cost of about $12 million in the current budget – the concern is that, likening the payment to a credit card, the city is simply paying the interest on its credit card balance while the overall principle continues to grow. This reality is exacerbated, Merolla added, by the fact that Warwick now has more retired city employees than active employees drawing healthcare and pension benefits.
“Basically, what that means for the average family is that, at the rate you're currently spending, your interest payments are going up 7 percent per year and you're never reducing your principle on your credit card,” Connors said.
In contrast to that picture, Warwick is actually in a healthy place in regards to the amount of debt it has tied up in shorter-term, general obligation bonds, with only about 2.5 percent of the city’s expenditures tied up into paying off such borrowing. Also, with the recent upholding of the city’s AA bond rating by Standard & Poor’s, the city would be in a favorable position to borrow through bonding to address certain capital needs.
But even with that being the case, the presence of the long-term debt breathing down the city’s neck means that, without some new way to generate income, taking on new capital bond debt would further stress the city’s financial condition in the future when those bills became due.
“So, while they're letting you have the money, at some point you do have to pay it back,” Connors said.
And speaking of capital needs, the Marcum report showed that Warwick’s long-term liabilities have exceeded long-term assets for the past five years, meaning that “at the end of every year for the last five years, your credit card debt has been higher than it was the year before,” Connors said, again using the family financial analogy.
And the city’s capital assets are not in good condition either. Of about $400 million in total governmental infrastructure assets – which includes things like school and municipal buildings, equipment and vehicles – $300 million has depreciated, meaning that the city’s capital assets have, on average, reached 75 percent of their useful lives.
“Seventy-five percent is a pretty significant number,” Connors said, indicating it earned the city a “yellow” rating in the forecast. “Your roof is 20 years old. Your boiler is 30 years old. Your car has 175,000 miles and your furnace needs to be replaced. You keep saying every year that you're going to start for it next year, but you never do.”
While the purpose of the meeting – which had been pushed back a couple times due to scheduling conflicts after it was originally proposed to be held this summer – was not to provide solutions about what to do to address the problems outlined in the report, that wasn’t to say there weren’t suggestions offered by some in attendance.
Cushman, for example, said at the podium that healthcare and pension costs are the area that needs to be examined, and expressed frustration that certain employee groups in the city receive guaranteed 3 percent cost of living adjustments (COLAs) within their pensions – and that some of those pension plans are worth well over $100,000 a year.
“We have to look at the entire structure of employee retirement benefits and we need to start doing a study first, because when you don't know what you're giving out or you don't know what the benefits are, how can you even propose any kind of changes?” Cushman said. “This is a complicated process here. We need to get all the facts out and then we need to start making decisions.”
At the very least, some members of the council wanted to find areas of consensus following the report.
“I think it's very important for everyone in this city, all of the employees, all of the taxpayers, all of us here in city government, at least admit that we are not on rosy street here,” said Ward 5 Councilman and council finance committee chairman Ed Ladouceur, who also brought up employee pensions as being an issue.
“Everything isn't just hunky dory,” he continued. “We have retirees now that are retiring with pensions of six, seven, eight and nine-thousand dollars a month in pensions. That's not what was going on 10 or 15 years ago, and it's not going to be what's going on 10 or 15 years from now. Because if we don't deal with these day-to-day business issues, and admit that we have a spending problem, and come up with a plan to fix it on everyone’s parts, then yeah, we're certainly going to have some significant issues and eventually the day is going to come where we're not going to be able to fix it.”
Others sought to point out that Warwick was not alone in its financial challenges.
“We just need to stay on top of this. But this is very important to bring this forward,” said Ward 7 Councilman Stephen McAllister. “The City of Warwick is not unique in this situation. We are going to be seeing these issues across the country. Big and small towns are going to be addressing this.”