Providence Lowers Pension Forecast to 8% - City Treasurer Calls Move "Band-Aid on Shotgun Wound"
Kate Nagle, GoLocalProv News Editor
Providence Lowers Pension Forecast to 8% - City Treasurer Calls Move "Band-Aid on Shotgun Wound"
"What I said today was, 8% is too high. Do I have an answer as to what it should be? No. But we need to look for a solution to bring it down. That's just unrealistic," said City Treasurer Jim Lombardi in an interview with GoLocal.
A report conducted by The Segal Group showed that in Fiscal Year 2015, the city's pension system was 28% funded with $354 million in assets and an unfunded liability of $894 million.
The firm then recommended that the city lower the assumed investment return to 8% and adjust mortality rates.
However, according to a memo from Internal Auditor Matt Clarkin, the 20-year expected rate of return for the city pension fund is actually 6.58%.
"I don't have anything negative to say about the vote or why the board voted that way," said Lombardi. "I did say that going from 8.25% to 8% is a good thing, but it's a band-aid on a shot gun blast to the chest. Is it helpful? Yes. But it's unrealistic that it will fix the problem."
"How do we deal with the unfunded liability when we give unrealistic rate of return? As Clarkin said, it's kicking the can down the road," said Lombardi. "As Treasurer I want to really address the problem. We need to get a realistic rate of return."
Prospect of Addressing Forecast
"The discussion today was based on we're doing this because of the budget -- I get that concern," said Lombardi, as the move to 8% will cost the city upwards of $4 million annually.
"I'm not looking to come in and say I'm going to harm the financial situation of the city, but we absolutely have a problem," said Lombardi.
In 2011, then-General Treasurer Gina Raimondo lowered the state pension system’s assumed return from 8.25% to 7.5%.
Lombardi noted that the possibility of revisiting the issue in the near future could prove difficult.
"The actuarial study is required once every three years -- and I believe that the board can only accept or reject the recommendations of the actuary," said Lombardi. "For us to lower the rate I believer there would need to be another experience study and presented to the board."
"My understanding if it was rejected today it would be sent to the council to determine. But the 8% was accepted," said Lombardi. "So when I say I don't have an answer, I do have some recommendations we can have conversations about it. There's no clear question about going go 7.5 or 7.25. You would need to reamortize. Is that the right thing to do? I don't know.
Providence Pension Liability
Unfunded Liability in 2013
Total Liability: $1.2 billion
Actuarial Assets: $380.4 million
Unfunded Liability: $831.5 million
Unfunded Liability in 2011
Total Liability: $1.2 billion
Actuarial Assets: $380.4 million
Unfunded Liability: $831.5 million
Percent Funded in 2013
Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.
Funding ratio in 2013: 31.39%
Percent unfunded in 2013: 68.61%
Percent Funded in 2011
Funding Ratio: The ratio of the amount of actuarial assets to the amount owed.
Funding ratio in 2011: 31.94%
Percent unfunded in 2011: 68.06%
Rate of Return
Former Assumed Rate of Return: 8.5%
New Assumed Rate of Return: 8.25%
What the state’s assumed rate of return is: 7.5%
What Moody’s Investors Service says the assumed rate of return should be: 5.5%
What investor Warren Buffet says the assumed rate of return should be: 6%
Actual Return on Investment
Actual Market Return in FY 2012: 1.49%
Actual Market Return in FY 2013: 11.35%
Current Assumed Rate of Return: 6.42%
Average Market Rate of Return for FY 12 and FY 13: 8.25%
Impact of Lower Rates of Return
$72 million:The city unfunded liability increased by this amount when the city lowered its assumed rate of return by a quarter of a percentage point, from 8.5% to 8.25%
$506.2 million: The estimated increase in the unfunded liability were the city to use the 6% assumed rate of return recommended by Moody’s Investors Service.
Retiree Pay – Fire and Police
Number on Active Duty: 834
Average Annual Pay: $61,325
Number of Retirees: 587
Average Retiree Age: 65.3
Average Retiree Annual Pay: $40,512
Disability Pensions – Fire and Police
Number on Disability: 418
Average Age: 64.8
Average Annual Pay: $59,028
Retiree Pay – Other City Workers
Number of City Workers: 2,164
Average Annual Pay: $38,687
Number of Retirees: 1,453
Average Retiree Age: 72
Average Retiree Annual Pay: $18,252
Disability Pensions – Other City Workers
Number on Disability: 88
Average Age: 66.8
Average Annual Pay: $18,684
Current Cost of Pension Fund
For 2013
City Contribution: $58.1 million
Employees Contribution: $10.9 million
Net Investment Return: $18.1 million
Cost of Retiree Benefits: $95.4 million
Note: Net investment return is the return on investments after investment and administrative fees have been paid.
Cost of Pension Fund in 10 Years
Normal Cost: $9.8 million
Additional Cost Because
of Unfunded Liability: $84 million
Total Annual Cost: $94.3 million
Note: Total figure for the year includes a small second payment for the deferred liability.
Cost of Pension Fund in 20 Years
Normal Cost: $13.9 million
Additional Cost Because
of Unfunded Liability: $118.5 million
Total Cost: $132.4 million
Paying Off Unfunded Liability
Average annual increase: 3.5%
Number of additional years to pay off: 27
Fiscal year unfunded liability to be paid off by: 2040
