PROVIDENCE, R.I. (WPRI) – The shortfall in Providence’s pension fund grew to $894.3 million last year after the city’s actuary revised the way it calculates the system’s assets to stop counting money the city hasn’t actually deposited into the account.

Previously, the city had counted its annual required contribution (ARC) to the pension system when it reported the fund’s assets on June 30 at the end of each fiscal year, even though city officials have long held off on actually making that payment until October.

But The Segal Group Inc., the actuarial firm Providence hired last year after filing suit against its old one, advised the city that going forward it should only count money it has deposited into the pension system as of June 30 when it files annual financial reports. As of June 30, 2014, the city reported that the market value of assets in its fund was $357.7 million. The previous year, that figure was reported as $393 million.

“We think that reflecting it that old way overstates the assets as of the valuation date,” Kathleen Riley, a senior vice president and actuary for Segal Consulting, told the City Council Finance Committee Tuesday night.

The change means Providence would need to contribute $66.5 million to its pension fund by June 30, 2015 in order for Segal to count that money as an asset when it completes its next annual review of the system. If the city doesn’t make that payment until October, Riley said, it would be forced to pay interest on the late contribution.

Riley told the committee the change in calculation “in many ways is not too meaningful,” but explained that is why the city’s unfunded pension liability grew from $831.5 million at the end of the 2013 fiscal year to $894.3 million in 2014.

“Historically very little attention was paid to funded ratio so it didn’t really matter how you reflected that contribution receivable,” Riley said. “But we think this is a cleaner approach to presenting your numbers, [and] a more accurate reflection of your assets in your fund and your funded ratio on the valuation date.”

Riley said that as long as interest is paid on the late payments, “it makes no difference” whether the contribution is made on June 30 or in October. She said Segal’s projections assume the city would make its payment by June 30.

So why has Providence historically held off on making its yearly pension deposit until October?

Cash flow.

Because June is the final month of the Providence’s fiscal year, the city typically has less cash on hand at the end of that month than it has in any other month of the year. For example, city officials project that Providence will have about $2.7 million cash on hand at the end of June, compared with about $43.6 million as of Thursday. (For those who pay their local taxes on a quarterly basis, April marks the final payment deadline of the fiscal year.)

By holding off on making the contribution to the pension system until October, the city can use first-quarter tax revenue to make the payment. It is unclear how long the city has been making October payments, but city officials said in 2014 that it has been happening since at least 2003.

Providence officials also shed more light this week on what makes up the city’s pension assets.

A report issued in late June 2014 by Providence’s investment adviser, Wainwright Investment Counsel of Boston, said the city’s invested pension assets totaled only $271.7 million, which is $86 million less than annual report said was in the pension fund.

But city officials said Wainwright’s $271.7 million figure only included assets that were actually invested as of last June. It did not reflect a $61.6 million contribution to the pension fund the city was scheduled to make four months later, nor about $26 million in loans taken out by city workers against their future pension benefits. (The workers pay 9.25% interest on those loans.)

Adding together the assets invested with Wainright, the annual contribution coming in October and the loan portfolio comes out to about $359 million, which essentially mirrors the $357.7 million market value of the pension fund’s assets Segal reported as of June 30, 2014.

The report shows 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. Segal 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.

However, Riley told the committee this week that the expected 8.25% return is “a little bit on the high side” in light of the economic environment. She indicated Segal is currently conducting another pension experience study for the city to guide future policy decisions.

A shift to a lower investment return forecast could be costly for Providence taxpayers, as the state learned in 2011 when then-Treasurer Gina Raimondo lowered its investment forecast from 8.25% to 7.5%. The change immediately increased the state’s unfunded pension liability by billions of dollars, and in response lawmakers passed the landmark pension overhaul later that year.

Segal estimates that reducing the Providence pension fund’s investment forecast from 8.25% to 7.25% would increase the city’s net pension liability from $872.6 million to $1 billion.

Continue the discussion on FacebookDan McGowan ( dmcgowan@wpri.com ) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan