Top 50 Pensions Cost Providence Over $5.5 Million Last Year

Top 50 Pensions Cost Providence Over $5.5 Million Last Year

A GoLocal investigation has uncovered that nearly fifty of the top pension earners in Providence garnered over $5.5 million in pension payments from the city over the past year.

SLIDES:  See Highest Providence Pensions BELOW

Records obtained through a public information request from the City of Providence show that the top 35 pensions go to police and fire retirees who received over six figures last year, and the majority were accidental disability.  (GoLocal's Stephen Beale had originally uncovered in May 2011 that 26 of the top 30 pensions at the time were retirements on disability.)

Looking forward, however, sides are split in the city as to the current state of Providence's pension system, following last year's landmark municipal pension settlement that eliminated high end COLAs and limited future COLAs, among other provisions. 

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"Not only has Providence understated its liabilities using a high discount rate and overstated it assets by $57 million it will have to use GASB 68 which will more than double the liability used to calculate the ARC. ARC payments will be dramatically higher consequently, eating into important and vital municipal spending," said financial analyst Michael Riley, who estimated the ARC would be over $90 million annually or 25% of the municipal budget.

Policy analyst Tom Sgouros however squared off with the assumptions laid out by Riley.

"Something you should know about the world of pension accounting is that the GASB accounting rules are highly controversial among accountants, actuaries, and pension managers. The original rules 25 and 27 that put public pension accounting on the same footing as private pensions, even though they face different risks, were pointless. GASB 43 and 45 that force governments to account for health care costs they will never face are nuts, and now 67 and 68, which make a dumb situation even worse, and have veered over into sadism," said Sgouros.  "The fact is that under most circumstances, a pension system can make all the payments it needs to make forever at levels far less than 100% funding, but the accounting rules forbid people from acknowledging that."

State of the City

Paul Doughty, head of the Providence firefighters union, said the he believed the city's pension system was doing fine -- for now.

"I do think the pension system is in good shape, in terms of its new footing, particularly the requirement that it be funded to at least 95% of the ARC.   It took a couple of decades to deteriorate, and so, under a watchful eye, it will take a few decades to recover and reach non-critical status," said Doughty. 

"Providence Firefighters are protected as much as possible from further pension turmoil. We entered into a consent decree, signed a cba", and required matching city ordinances. Essentially, three rings of protection around the deal we struck, which will help restore the pension to sustainable levels," continued Doughty. "This agreement is fair and equitable given the choices we faced. We felt strongly that we would have prevailed in the courts on the merits of our former pension agreement. But that well may have been a Phyricc victory, becoming the straw that broke the camel's back and forcing the city into bankruptcy."

Sgouros remained adamant that fully funding -- or has he said, "prefunding" the pension system, as advocated by some, might not be in the city's best interest.

"Standing in 1990, looking back, the 6% COLAs seemed reasonable.  Obviously, it was a huge mistake instead of putting that number instead of tying to inflation amount.  The COLA should just be a way to address inflation," said Sgouros. "Most of the top pensions today -- it should be clear this was Buddy's gift to the city.  How did he get support he needed in the '94 election?  It's not that hard to see."

"These are debts that stretch out, that's due when the youngest current city employee dies, we're talking about when a 20 year old dies," continued Sgouros.  "The last dollar of that debt isn't due for 60 years -- but they're insisting that the whole debt be paid off by 2040, so they're prefunding by decades.  It's a waste -- and its decades sooner than it needs to be.  This is the prefect example of government waste, but no one calls it that.  It's a serious problem, but that's what they want us to do."

"The rules are controversial -- actuaries and accountants argue about it all the time, and they invoke all their actuarial indignation to tell you that they're wrong. The math isn't that that complicated -- the math is messy but not hard."

Facing the Next Mayor?

So what is the scenario likely facing the next Mayor of Providence?

"Even before the new standard for calculating a municipality's unfunded pension liability is implemented, Providence pension system is at best 31% funded.  As GoLocalProv reported several months ago, Providence's OPEB is effectively unfunded altogether," said Monique Chartier with the group RI Taxpayers.  "This means that at some point, there will be no money to pay the pensions promised to retirees."

Chartier continued, "It is clear, accordingly, that Providence's pension system is very far from sound.  Mayor Taveras did not go nearly far enough with the pension "settlement" that he reached.  In order to address these very serious shortfalls, the next mayor will need to re-open negotiations with retirees.  The only other option, which R.I. Taxpayers does not advocate, is a Central Falls-style municipal receivership in which drastic cuts are made involuntarily to all pensions."

Riley offered his suggestions of how to proceed.

"My prescription of course is to be honest..be honest with the numbers and be honest with the people. Go out and collect back taxes on businesses and individuals. End unnecessary tax incentives. Implement wage reductions of 10 to 15% for at least 5 years for all municipal employees. Negotiate with all parties a further $300 to $500 million in cost savings. End the practice of hiring new workers into defined benefit plans. Sell the Superman building to someone who will pay taxes. Increase PILOTs by 30% ending and resetting  in 3 years," said Riley.

The Mayoral candidates varied in their assessments of the city's pension system -- and if the recent negotiated pension settlement was enough.

"Those who have served the city deserve to retire with dignity, and it is through broad-based economic growth that we can ensure all our pension obligations continue to be met. Mayor Taveras and those who serve the city worked hard to make difficult cuts and sacrifices," said Democratic candidate Brett Smiley.  "This has provided us with a window of opportunity for a new mayor to bring Providence through an economic renaissance - one who will capitalize on our strengths and oversee a period of transformative growth."

"There are a lot of different opinions on the fiscal health of our pension system, but one thing we all agree on is the need for action. The steps that Mayor Taveras took have provided some breathing room for us so that we are not on the verge of bankruptcy, but that doesn't mean we can breathe easily either," said Democrat Jorge Elorza.  "The only real solution to ensuring the long term health of the system is to grow our way out of it. If we don't have the tax base necessary to make the payments, then it doesn't matter how the system is structured. As Mayor, my top priority will be to strengthen our economy and tax base so that the City has the money to make the payments."

Democrat Lorne Adrain, however, was specific in his critique of the city's pension system.

"The Providence pension system is not very sound. Despite an incremental improvement in the liability from the last fiscal year, the system is on very shaky ground. The pension plan is only about 25% funded. Plan assets are more than $323 million while plan liabilities are over $1.2 billion. The discount rate Providence uses to calculate its liability (8.25%) is unrealistic in the current climate, and is clouding an already complex problem. I believe it should be based on realistic investment assumptions that are no better than the median assumptions used across the country," said Adrain.  "There are many political reasons to make rosy assumptions, but that is not responsible or fair to plan participants and taxpayers.  Providence needs a Mayor with a full understanding of the current crisis: One who is fully committed to presenting the problem with full transparency."

GOP candidate Dr. Daniel Harrop, who serves on the board with Riley at the RI Center for Freedom Prosperity, said the city's pension system was "not sound at all."

"I would recommend that future valuations exclude discounted contributions from reported assets which inflates the numbers used. This has been the problem for years: not using actual numbers which give the citizens and pensioners  of Providence a false sense of security, although we are reaching the end of that trick now."

While Sgouros disagreed with the assumptions put forth by Riley and Harrop, he said that he believes there is "plenty of common ground."

"This ought to be a political issue but it's been captured by technical people," said Sgouros. "Providence is not going to be liquidated. A hundred years from now there will still be a city...insuring against the city's disappearance makes no sense.  What is the actual risk a fully funded municipal fund faces?  That people will get 6% COLAs...we've seen what happens with that.  You want some pressure on the system.  Paul Tavares, who was state's treasurer in the 90s, his office said, "we don't want it fully funded" -- 6% COLAs are the kinds of things that can happen when you don't feel pressure."