This report was originally published on 10/30/2017.
PROVIDENCE, R.I. (WPRI) – Shortly after 2 p.m. on Sept. 17, 1996, then-Providence Mayor Vincent A. “Buddy” Cianci Jr. sat in small conference room on the third floor of City Hall munching on low-fat cookies as he was delivered stunning news.
After years of unsuccessful legal battles fighting the generous retirement benefits awarded to a group of former public safety workers, new calculations showed Cianci needed to more than double Providence’s annual contribution to the city’s pension system in his next budget, from $19 million to $42 million. And the payments would need to be increased every year.
“I think the unions ought to be made aware of this,” Cianci told the Board of Investment Commissioners, the panel tasked with investing Providence’s pension money. “I mean, the city will no longer exist if we have to come up with this kind of money.”
Cianci, who served as chair of the investment board, was one of only 11 people in Committee Room A when he made his dire prediction that day. But like most public meetings in City Hall, this one was recorded and archived. The city clerk’s office is now in the process of publishing the recordings of many meetings online, shedding new light on how Providence got into such deep financial trouble that some have raised the prospect Rhode Island’s capital will go bankrupt.
A Target 12 review of more than 60 hours of newly-released recordings of investment board meetings between 1995 and 2002 shows Cianci and other officials were well aware then that the city’s unfunded pension liability was spiraling out of control, but none of the ideas they had for rescuing the system ever materialized.
Instead, records show the city failed to contribute more than $88 million it owed the pension system during that eight-year period, even as Cianci was reporting rosy annual operating surpluses every single year. In reality, if officials had made the full required payment to the retirement fund in each of those years, seven of Cianci’s final eight years in office would have resulted in deficits.
“The city was underpaying its pension system by about $15 million a year,” current Mayor Jorge Elorza told Target 12 in a recent interview. “Those underpayments, they add up.”
Now Elorza — the Democrat who defeated Cianci when he attempted to return to City Hall in 2014 — is staring at an unfunded pension liability that has exploded from $167 million in 1993 to $985 million in 2016, according to current and historic city financial documents. As of last year the city had just 25% of the money it needed to cover future payments to retirees, according to a projection by its actuary.
Even with recent reforms that were designed to right the wrongs of the 1990s and lock in large future payments to the pension system, Elorza is warning that more needs to be done if city leaders want to avoid having the same conversations about Providence’s finances decades from now.
“There is no set point at which we fall off of a cliff,” Elorza said. “But we know if we don’t do something, we will eventually fall off of a cliff.”
Twenty-one years ago, analysts thought the end of the cliff might come in 2017.
At a Jan. 17, 1996, meeting, members of the investment board were briefed on the status of Providence’s pension system by Eric Bertonazzi of H.C. Wainwright & Co., a Boston-based investment firm that had just been hired to manage the retirement fund. Bertonazzi remains the city’s lead investment advisor today, but he now works for Wainwright Investment Counsel LLC, which spun off as an independent company in 1999.
While the investment board and its advisors aren’t directly responsible for the policy or budgetary decisions city leaders make when it comes to retiree benefits, Bertonazzi wanted his clients in Providence to know he considered the pension system “woefully underfunded at this time.” If the city did nothing, projections showed, the pension system would run out of money by 2017.
“In discussions with the actuary, and hopefully this presentation will show this, you’ll find, just to cut to brass tacks, there is no reasonable investment assumption, investment scenario, that I can generate which will rescue this plan,” he told the board.
Cianci asked for a solution that wouldn’t force him to raise property taxes through the roof, but no one offered an idea. In an attempt to lighten the mood, the mayor put forward his own suggestion: “How about if we took million-dollar life insurance policies out on all the old people?”
This wasn’t the first time Providence officials had been warned that the pension system might go “kaput,” as Cianci put it that day.
Ever since the city’s union-dominated Retirement Board voted in 1989 to give a group of retirees 5% and 6% compounded annual cost-of-living increases (COLAs), officials warned the fund could collapse. Records show the city’s unfunded pension liability swelled from $137 million in 1991 to $412 million by 1995.
As a result of the COLA agreement, hundreds of retirees saw their benefits double roughly every 12 years, eventually leading some former workers to earn more than $100,000 a year in retirement. The highest-paid current city retiree is former Fire Chief Gilbert McLaughlin, who earns $197,000 a year tax-free as a result of an injury he suffered on the job. (The city reports 39 of the 50 highest-paid current retirees have tax-free disability pensions.)
The city at first challenged the COLAs in court, but in 1991 Cianci gave up the fight, agreeing to sign a consent decree that kept them in place. The state Supreme Court eventually sided with the city, ruling that the Retirement Board did not have the power to grant COLAs — but Cianci’s decision to sign the consent decree meant the city still had to pay. (Cianci would later say he had followed the advice of city lawyers.)
At the time of the Sept. 17, 1996, investment board meeting, the city actuary had just released estimates for how much the city needed to increase its yearly payment to the pension system. Without the consent decree – which was still being litigated in a last-ditch effort to reverse it – the city was expected to pay about $19 million during the 1998 fiscal year. With the consent decree, the figure jumped to $42 million.
A one-page schedule of contributions handed to members of the board showed the annual contribution would rise to $62 million by 2007 and $101 million by 2017. Cianci said the payments were unaffordable.
“I want to know who the mayor is going to be in the year 2017 when he’s got to come up with $101 million dollars,” Cianci said. (Reforms undertaken in subsequent years lowered that amount, but it still soared: the actual payment owed this year was $73 million.)
Eventually the city found a solution that benefited Cianci politically at the time but would leave Providence on the brink of bankruptcy by 2012: city leaders stopped making large chunks of the scheduled payments to the pension system.
In 1998, when the city’s actuary suggested the annual payment to the pension system should be $35.7 million, the city contributed $20.5 million. The following year the city paid $21 million, just 56% of the amount the actuary recommended. Between 1998 and 2002, the city never made more than 64% of its contribution to the system. (Doing so was not illegal: there was no state law or local ordinance on the books that required Providence to makes its full pension payments.)
At the same time, the city was reporting annual surpluses to the public. In 1998, Providence reported spending $220,000 less than it took in. By 2000, the surplus was $1.2 million.
“It’s very appealing to an elected official to promise more benefits and lower costs now because often the result of that doesn’t really come home for 20 and 30 years,” Keith Brainard, research director for the National Association of State Retirement Administrators, told Target 12 in a recent interview.
Brainard called the city’s current funding level of 25% “a serious problem,” noting that the average local pension plan around the country is around 70% funded.
“The city of Providence is going to have to do some soul-searching about how it’s going to resolve that problem,” he said.
Some of that work started after Cianci was forced from office in 2002 when he was convicted on a federal racketeering conspiracy charge. He would serve more than four years in prison before returning to Rhode Island to host a popular radio talk show. He made one last attempt to return to City Hall in 2014, but lost to Elorza by seven percentage points. He died in 2016.
During his 2014 comeback bid, Cianci defended his management of the city pension system. “Money was more plentiful, people weren’t living as long, the economy was better, actuarial assumptions were much different,” he told Target 12 that June. “All that entered into the decision-making.”
In the years after Cianci left City Hall, his successor David Cicilline committed to making larger pension payments, increasing them from 80% of the actuary’s recommendation in 2003 to 96% in 2006. When the Cicilline administration contributed $50.7 million to the fund in 2007, it was the first time the had city made its full required pension payment in 12 years.
After Cicilline left City Hall to become a congressman in early 2011, his successor Angel Taveras took even larger steps to stabilize the pension system. Amid warnings that the city was nearing bankruptcy, he negotiated an agreement with the municipal unions and retirees that suspended 3% COLAs for 10 years, eliminated 5% and 6% COLAs forever and placed a cap on how much retirees could earn from their pension.
The deal also required the city to make at least 95% of its actuary’s recommended pension payment, effectively prohibiting future mayors from shorting the fund. The city’s annual pension payment is projected to grow by at least 3.5% a year over the next two decades, from $78 million in the current fiscal year to $150 million in 2036. If the payments are made on schedule, it’s projected the pension system would be fully funded by 2041.
“For us, our interest was to make sure you put the money in because that’s a present-day issue,” Paul Doughty, president of the city’s firefighters’ union, told Target 12. He said he never would have signed on to the agreement with Taveras without the stipulation that requires the city to make future payments.
Elorza credits both Cicilline and Taveras with taking steps to improve the health of the pension fund, but he is also adamant that there is more work to do. (All three are Democrats; Cianci was a Republican-turned-independent.)
Investment board records show the pension fund had about $281 million in assets to invest as of Dec. 31, 2016. At the same point during Cianci’s last full year in office, the fund had $289.5 million. (The city holds another $25 million in loans that current employees have taken against their future pensions, which they are required to pay back with 8.5% interest.)
In the current fiscal year, the city is scheduled to contribute $78 million to the pension fund but pay out significantly more: about $90 million is owed to approximately 3,200 retirees or their designees. Since 2005, the city has contributed $723 million to the fund, but $956 million has been withdrawn by retirees, for a net loss of $233 million.
While Providence’s current pension payment schedule will eventually improve the system’s funding ratio, Elorza said the amounts it calls for taxpayers to put in are “unsustainable.” Even this year’s payment of $78 million represents 22% of the city’s total tax levy.
“If we don’t do something maybe over the next decade or so, then 20 years from now, the city’s going to be in the exact same position,” Elorza said. “Folks will be asking, ‘Do we have to look at bankruptcy? Do we have to look at receivership?’”
Elorza has been advocating for the General Assembly to allow Providence to sell or lease its water supply, which he believes could generate $300 million. State lawmakers have declined to take up a proposal to create a regional water board that would have the ability to buy or lease water systems. (The mayor maintains that every dollar would be earmarked for the pension fund.)
Elorza also said he has a working group studying other options for the pension system, although his aides acknowledge the panel has only met three times in the last year.
“The city can limp along for a while, but we don’t want it to limp along,” he said. “We could cut deeper into the bone, but that doesn’t benefit anyone. No city has ever cut its way to greatness.”