PROVIDENCE, R.I. (WPRI) – A group of city leaders studying Providence’s pension system has released a study outlining options for saving the beleaguered fund, from monetizing the water supply to reducing current retirees’ monthly payments.
The report – prepared by outgoing chief operating officer Melissa Malone, City Council President David Salvatore and Councilors Sam Zurier, Sabina Matos and Nirva LaFortune – suggests it is unlikely any one decision, including bankruptcy, will be enough to resolve the pension system’s staggering shortfall, which hovers around $1 billion.
Instead, the report says a combination of tools should be considered to reduce or stabilize the city’s annual contribution to its pension fund, which is projected to grow from $78 million in the current fiscal year to $175 million by 2040. The current city budget is $736.7 million.
“The city’s pension fund has been in ‘critical’ condition for decades, and the current schedule of required payments is a recipe for disaster,” the group wrote in its report. “There are no rabbits to pull out of this hat, and the problem only grows more expensive and painful with each passing year of inaction.”
- Read: The full report
- Also: Everything you should know about Providence’s finances
- More: How Buddy Cianci predicted the city’s pension crisis
The pension system was just 25.28% funded as of June 30, 2017, meaning the city had only $348 million in assets available to cover $1.35 billion in promised retirement benefits. If the city follows its current schedule of annual pension payments and the fund averages an annual investment return of 8%, the system would be 62% funded by 2034, according to current projections.
But the report recommends that city officials draw up a plan for reaching a 60% funding level within 10 years, a lofty goal that would bring the city out of the state’s definition for “critical” status. The group suggests the city implement a public engagement strategy by the end of September and release a final plan by Dec. 31.
Among the possible reforms the report suggests considering:
- Increase current city employee contributions from between 7.5% and 8.5% to 10%, which would need to be collectively bargained with the city’s public employee unions and would “represent at most a solution to 10% of the problem.”
- Transition to a hybrid defined benefit, defined-contribution 401(K)-style plan for current employees similar to the one implemented in 2011 by the state of Rhode Island, which would “purchase long-term stability at a substantial short-term cost.” Under one scenario reviewed by the group, the city’s annual contribution would immediately grow by $20 million, but would remain fixed for future years.
- Extend the existing suspension of cost-of-living adjustments (COLAs) for retirees from 2022 to 2034, or reduce all pensions of more than $2,000 per month by 5%. The report notes that any changes for retirees would be “very difficult” without an agreement because of an existing consent judgment negotiated under former Mayor Angel Taveras.
- Increase the city’s annual contribution in an effort to make up for $120 million the city failed to pay between 1991 and 2012. But the city has limited ability to significantly increase its annual payment because state law caps the annual growth of the city’s tax levy at 4%.
- Sell or lease Providence’s water supply to a public or quasi-public body, an option Mayor Jorge Elorza has repeatedly said he favors. The water system was valued at $400 million last year, but any proposal is likely to face opposition from the General Assembly. There are also legal questions about who owns the water system.
The report makes it clear that “if the city does not solve its pension issue, bankruptcy will follow.” But the group found the city is unlikely to qualify for bankruptcy based on its current financial position and “even if the city were to qualify, the damage from bankruptcy proceedings likely would exceed the relief they could provide at this point in time.”
The report calls the city’s unfunded pension liability “Providence’s version of the global warming crisis” because it’s an “existential threat looming on the medium-term horizon that becomes more difficult to solve with each successive year of inaction.”
“While each stakeholder has a particularly, deeply felt reason to deny responsibility for this problem, oppose any solution they believe will balance the pension budget ‘on their back’ and argue that someone else should be asked (or required) to resolve it, all of them hold a stake in the city’s well-being, and all of them will suffer from the consequences of the city’s financial ruin,” the report states.