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Providence, Warwick have no money saved for $1.4B in health care liabilities

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PROVIDENCE, R.I. (WPRI) – The state’s top auditor has called on two of the largest cities in Rhode Island to start saving money for future health care costs, estimating the two communities should already have saved a combined $1.4 billion.

Auditor General Dennis Hoyle last year contacted the mayors of both Providence and Warwick, calling on them to establish trust funds for so-called “other post-employment benefits” – or OPEB – which are ballooning in cost, according to letters obtained by Target 12. The lion’s share of such benefits is health care for retirees.

Providence currently has a $1 billion OPEB liability, representing how much money the capital city should have tucked away to cover future health care costs for employees after retirement. Warwick, meanwhile, has a $406 million OPEB liability. Neither city has any money saved for the expense.

“Much attention has been focused on the city’s significant pension liabilities over the years,” Hoyle wrote in October to Providence Mayor Jorge Elorza. “Significantly less attention has been focused on the city’s OPEB liabilities.”

Providence recently touted the fact that it again made 100% of the required annual payment toward its pension fund, which is also underfunded by more than $1 billion.

But unlike its pension fund, which has about $367 million put away to help pay out for pensions and earn investment income, Providence has zero dollars set aside for future health care costs.

“Advance funding reduces the ultimate cost to the city and its taxpayers because part of the cost for future retirement healthcare benefits can be met through investment earnings,” Hoyle wrote.   

Instead, Providence and Warwick cover annual health care bills on a pay-as-you-go basis. Accounting groups say that’s a risky strategy, considering the average cost of health care per person totaled $11,172 in 2018 compared to $355 in 1970, according to the Peterson-Kaiser Health System Tracker.

“Advance funding is a ‘best practice’ recommended by the Government Finance Officers Association and others,” Hoyle wrote, adding the first step to move in that direction is to set up an OPEB trust fund.

He pointed to the state as an example of how a trust fund can be beneficial, as Rhode Island started pre-funding OPEB costs in 2011. Today, the state’s unfunded OPEB liability totals about $564 million for plans covering 11,500 active employees and 7,100 retirees. That’s about half the $1 billion unfunded liability in Providence, which claims about 4,400 active employees and 3,800 retirees, according to Hoyle’s letter.

Despite the auditor general’s call for action, however, Providence has no formal plans at the moment to establish such a trust fund.

“Currently, we are exploring multiple options to address the city’s long-term financial liabilities,” Elorza spokesperson Patricia Socarras wrote in an email. “Creating an implementing a trust would require collaboration across all parties, including potential contract changes to ensure predictable and stable retiree health benefits for every employee.”

In Warwick, the path toward creating an OPEB trust fund looks clearer. As part of the new, controversial firefighter contract ratified by the Warwick City Council on Monday, Mayor Joseph Solomon will establish an OPEB fund for firefighters hired after July 1.

New hires will be required to contribute an additional 2% of their pay toward OPEB costs, which the city estimates will reduce the city’s obligation to those employees by 30% – although some critics have challenged that assumption.

Regardless, Solomon expects taking a step toward pre-funding OPEB costs with new firefighters could lay the groundwork for similar action in the future.

“The mayor believes that this contract provision establishes the mechanism for OPEB trusts and other reforms for future negotiations with all city unions,” Solomon spokesperson Susan Baker wrote in an email.

Providence and Warwick are not the only two Rhode Island communities with soaring OPEB liabilities, but Hoyle said they stand out. The need to focus on OPEBs costs should be comparable with pensions, he added.

“Over time, there has been more of a consistent focus on pension liabilities and less on OPEB liabilities; however, from a financial reporting perspective, they are undistinguished,” Hoyle wrote to Solomon.

Eli Sherman (esherman@wpri.com) is a Target 12 investigative reporter for WPRI 12. Follow him on Twitter and on Facebook.

Copyright 2020 Nexstar Broadcasting, Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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