PROVIDENCE, R.I. (WPRI) – When the fiscal year comes to a close at midnight Tuesday, Providence officials will still have one massive bill left to pay: a $66.5-million contribution to the city’s pension system.
But for at least the 11th consecutive year, the city is planning to make the majority of its annual required contribution, known as the ARC, sometime after first-quarter tax revenues begin flowing in on July 24. In other words, the city will use money it receives during the 2015-16 fiscal year to cover a leftover tab from the 2014-15 fiscal year.
It’s a practice that Rhode Island Auditor General Dennis Hoyle calls “not desirable” – but also “not fraudulent” – and it’s one Mayor Jorge Elorza says he plans to change over the next several years.
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In an interview Monday, Elorza said the city is beginning to implement a “corrective action plan” that will result in Providence making its annual required contribution to the pension system by June 30 each year. He said the city has generally completed its payment in October for more than a decade.
“From a cash flow perspective, it’s going to be difficult to move the date of the payment back right away, but we have a three-year plan to continually move that payment back, meaning earlier in time,” Elorza told WPRI.com.
The ARC is not made in one lump sum and not all of it is deferred until October. Payments are divided up across various departments throughout city government. For example, about $12.4 million in pension payments from the city’s school department, workforce solutions department and the Providence Water Supply Board will be made Tuesday, according to Elorza spokesman Evan England.
Elorza’s corrective action plan comes after The Segal Group Inc., Providence’s actuarial firm, advised the city that it should only count money it has deposited into the pension system as of June 30 when it files annual financial reports. In the past, the city included the October payment as a receivable and counted it as an asset of the pension system.
Under the changes, the city reported that the market value of assets in its fund was $357.7 million as of June 30, 2014, according to Segal. The previous year, when the October payment was still being counted, that figure was reported as $393 million. The calculation is also why the city’s unfunded pension liability grew to $894.3 million in 2014.
At a City Council Finance Committee meeting in April, a representative from Segal told the panel the change “in many ways is not too meaningful,” but did say the city would need to pay interest if the payment is made in October and the city still wants to make 100% of its annual required contribution. (Under an agreement struck with the city’s unions and its retirees in 2013, the city is required to make at least 95% of the ARC each year.)
The city’s decision to complete its payment in October has come under scrutiny over the last year.
In a series of op-eds for the website GoLocalProv, former Rhode Island congressional candidate and asset manager Michael Riley has suggested the city has misled investors by making its payments in October rather than during the fiscal year. Last week, Riley told Bond Buyer he filed a complaint against the city with U.S. Securities and Exchange Commission.
In a letter written to Riley, Hoyle, the auditor general, said he does not “believe it is fair or appropriate to characterize the city’s accounting for this matter as a ‘scam and fraud.'” He did call timing of the city’s contribution “problematic,” but attributed it to timing and cash flow. Separately, he told WPRI.com he has talked with the city about moving the payment up.
Last month, before Elorza announced plans to restructure the city’s fire department, firefighters’ union president Paul Doughty said he planned to file suit against the city in an effort to force the contribution to be made on time. As of Tuesday, there was no record that the suit had been filed.
Before the City Council approved its $696.1-million budget for the 2015-16 fiscal year earlier this month, Councilman Sam Zurier introduced an amendment that would have eliminated a tiny tax break for rental property owners and instead used the $1.2 million budgeted for the reduction to cover the interest on the late pension payment. If the city knows it can’t make the pension payment on time, Zurier reasoned, it should at least set aside the money to pay for the interest. The proposal failed, garnering just four votes.
According to Segal, Providence’s pension fund was just 29% funded as of June 30, meaning its $357.7 million in assets would cover less than one-third of the retirement benefits the city has promised its workers over the years. The firm said it expects the pension system will be only 27.4% funded by June 30, 2015.
The shortfall between the city’s pension assets and its pension obligations is supposed to be closed over the next quarter-century thanks to rising contributions from taxpayers and workers along with the fund’s investment earnings.
Providence continues to assume its pension fund investments will earn an average annual return of 8.25%, and projects the city’s pension system will be fully funded by 2041 if the investment forecast is accurate and contributions are made on schedule.
Now that he’s committed to moving the annual pension payment up to June 30 over the next three years, Elorza said he doesn’t consider the ratings agencies an immediate concern.
“There is no sort of doomsday that they’re predicting or warning against for continuing to do this,” Elorza said. “But at the same time, I’m an accountant and I know it’s important to comply with accounting standards and over the next several years, we have a plan in place to make sure we’re making [payments] within the fiscal year.”This report has been updated.