R.I.’s reform of state worker pensions was only the tip of the fiscal iceberg that awaits cities and towns

DIRE PREDICTION: Johnston Police Department Detective James Brady, president of the International Brotherhood of Police Officers Local 307 in Johnston, discusses the town's combined police and firefighter pension plan. He estimates that unabated, the plan could go bankrupt in eight years. / PBN PHOTO/MICHAEL SALERNO
DIRE PREDICTION: Johnston Police Department Detective James Brady, president of the International Brotherhood of Police Officers Local 307 in Johnston, discusses the town's combined police and firefighter pension plan. He estimates that unabated, the plan could go bankrupt in eight years. / PBN PHOTO/MICHAEL SALERNO

Editor’s note: This is the first of a four-part series exploring how well Rhode Island cities and towns are funding municipal pension and benefit plans and the public-policy ramifications.

The financial challenges of taking care of her daughter, Miranda Rose, who has Down syndrome, have grown for Linda M. Connell since 2011. That’s when Providence stopped increasing pension payments based on yearly cost-of-living adjustments.

The widow of James F. Connell, who retired as a sergeant of the Providence Police Department and died earlier this year, told a Rhode Island Superior Court judge on April 21 that the costs associated with caring for her husband and Miranda soared in recent years.

“The fact that Miranda and I will no longer have the opportunity to receive the COLA will greatly affect us,” said Connell, who now lives in Port Saint Lucie, Fla.

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After an emotional Connell stepped down from the witness stand, former Providence Mayor Angel Taveras took her place and defended his 2011 decision to change the city’s pension and health care system. His reform – which was negotiated with unions representing current employees as well as ad hoc groups of retirees – froze all cost-of-living adjustments for a decade, eliminated 5-6 percent increases entirely and moved all retirees age 65 and older to Medicare. Some of those retirees are challenging the settlement terms.

“I thought I was completely justified under the circumstances,” he said, evoking murmurs of dissent from the group of about two dozen former city employees who were sitting in the courtroom.

Taveras entered office in 2011 facing a projected $110 million structural deficit. City pensions and other post-employment benefits, known colloquially as OPEBs, were driving factors behind the shortfall.

The locally administered pension plan carried an unfunded actuarially accrued liability of $903.3 million with a funded ratio of 31.9 percent, which is a measure of assets available to pay benefits. OPEBs, which include fast-rising health care costs, totaled $1.5 billion with a funded ratio of 0.1 percent.

Providence’s struggles show how underfunded pension and OPEB systems can weaken a city’s budget. And they are playing out or soon will be in communities across the state and nation. In a state still recovering emotionally from the wrenching state-worker pension battle and ultimate settlement, the municipal crisis threatens to be even more contentious.

In a 2015 report, a state-run commission calculated that the combined unfunded amount for the 34 locally administered pension plans across 24 Rhode Island cities and towns exceeded $2 billion, while the aggregate OPEB liability totaled $3.1 billion and was funded at just 1.4 percent.

And while a handful of municipalities have taken steps toward mitigating the fast-rising obligations on the pension side, many are still a long way from solid ground, and a handful continue to flounder.

OPEB obligations, however, present an impending crisis everywhere, according to R.I. Department of Revenue director Robert S. Hull, whose department oversees municipal finance. Appointed in February, Hull is still wrapping his arms around the issue, but says it’s a problem that needs to be addressed.

“The health care liabilities that cities and towns incur is the same drama that’s playing out at a national level in every municipality in the country,” Hull said. “I would say that probably is a crisis, because we don’t know where the end is.”

HOW WE GOT HERE

Several decades ago, union and municipal leaders sat down and made promises to one another: Municipal workers would labor in exchange for salaries, pensions and health care benefits.

In many cases, the agreements covered not only the workers, but also spouses and children for life. At the time, the financial obligation to cover these agreements was a marginal piece of each city’s budget and, despite some contractual agreements, much of the obligations were covered on a pay-as-you-go basis. But over the decades, the number of retirees has grown as demographic trends shift toward an older U.S. population due to people living longer. The obligations have ballooned over time and are exacerbated on the OPEB side by the dizzying year-over-year increase of health care costs. The liabilities each year are eroding the fiscal stability of municipal budgets throughout the state.

“If there were no unfunded pension liability, the city’s budget would have another $63 million,” said Brett Smiley, Providence chief operating officer, “and that’s not counting OPEB.”

Because these benefits take up such a large chunk of each budget, municipal leaders often must decide between trying to pay down the unfunded amounts or pay for basic services, such as fixing potholes or dilapidated school buildings. And because the latter is what the majority of taxpayers tend to pay attention to, each budget cycle, the unfunded liabilities get pushed further down the road.

“There’s a lot of interest if a community quadruples the amount of money it puts in a budget for public education, or open-space acquisition, but pay toward the reduction of liabilities and [taxpayers] don’t see anything palatable. It’s not something they can sit on or walk on,” said Daniel L. Beardsley Jr., executive director of the Rhode Island League of Cities and Towns. “But it’s important because when those liabilities grow, it erodes the fiscal stability of the community.”

Last year, the 14-member Local Pension and OPEB Study Commission reported that the funding issues for both pension and OPEBs at the local level are in some instances “both severe and urgent.”

Despite the tone of urgency, however, very little has been done from a legislative standpoint since the report was released as a set of recommendations to the General Assembly and Gov. Gina M. Raimondo’s office. Last fiscal year, on the pension side, nine local plans failed to meet 100 percent of the annual determined contribution – which is an actuarially calculated amount each municipality must pay as a minimum amount each year – at the same time that nine plans were funded at or below 30 percent. The latter is an exposed position for any city or town, according to Dennis E. Hoyle, the state auditor general. He’s charged with limited oversight of the locally administered plans in conjunction with the Division of Municipal Finance, a branch of DOR.

“Anybody that’s funded in the teens and 20s obviously doesn’t have a significant amount of assets accumulated, so they could be potentially in a situation where there’s more money going out than in,” Hoyle said. “And they’re most vulnerable in a down market, because if there’s a 20 percent reduction in their investments, it just exacerbates the problem.”

Last year, both Lincoln and Woonsocket had plans that fell below the 60 percent mark – entering what is considered “critical status.” (Lincoln has contested this calculation, and the state is reviewing its claim.) Funded ratios fell for at least eight plans.

Previously, the state divvied up $5 million in “municipal incentive aid,” which went toward municipalities that were meeting financial-improvement-plan requirements for their pensions, as submitted to the commission. Susan Greschner, chief of the municipal finance division, says that aid was an effective incentive. But the funding has dried up and is not included in the governor’s fiscal 2017 proposed budget. The state general treasurer also has legal authority to withhold municipal aid – outside of education – but that has never happened, according to Greschner.

And OPEB plans, the vast majority of which until a few years ago were funded at 0 percent and covered by pay-as-you-go systems, are in even worse shape.

“I think before 2007, there was no discussion at all around OPEB,” Greschner said.

Municipalities are not technically required to report their unfunded OPEB amounts on each year’s balance sheet, and the state has not calculated an aggregate amount since the commission disbanded in 2015.

But the R.I. Interlocal Risk Management Trust has begun pooling assets from participating municipalities to try to get out front on this issue. To date, the trust has grown assets to $26 million between 17 communities, and Ian C. Ridlon, president and executive director, expects membership to grow.

He says municipal leaders are beginning to wake up to the OPEB liabilities because accounting guidelines will require them to disclose the amounts on balance sheets beginning in 2018, which makes a town budget appear much worse off than now, as the liability is reported as a footnote.

“Ten years ago if you said ‘pension liabilities,’ people would understand and know it’s a big problem,” he said. “If you walked out now and ask someone, ‘Do you know what an OPEB liability is?’ No one would know what it is. No one. But as people start to hear about it more, they will understand.”

Some municipalities have yet to put anything toward the obligations, which Hull points out is an issue throughout the country.

“I don’t think anyone has come up with a master answer to OPEB funding nationwide yet,” Hull said. “It’s moving so far ahead of us with escalating costs.”

‘WHO’S GOING TO PAY?’

Cranston Mayor Allen W. Fung doesn’t mince words when describing the difficulty of negotiating pension and OPEB systems with current and future retirees.

“I’ve been a lawyer for [more than] 20 years, and I’ve negotiated many multimillion [dollar] deals,” he said. “But this was one of the most challenging negotiations I’ve ever been a part of.”

Cranston’s police and fire unfunded pension liability is $229.6 million and like Taveras, Fung went through his own version of reform. He switched all employees hired after 1995 to a defined-contribution plan (pensions are known as defined-benefit plans), which is administered through the city. The city is now funding its plan at 100 percent or more of its annual required contribution for both the new and old plans. But the old plan, comprising 32 active employees and a total of 426 beneficiaries, is underfunded. At the same time, its OPEB unfunded liability is $55.8 million, funded at 6.8 percent. And while the OPEB asset is growing, at that level it still worries Fung.

“If you don’t have enough cash to pay your obligations and keep dipping into your reserves, you’re going to be in trouble, because you’re going to run out of cash one day,” he said.

Beyond Providence, the unfunded liabilities for pensions are the largest in Rhode Island’s biggest municipalities, including Warwick’s Police I & Fire I plan at $208 million, Pawtucket’s Post 1974 Police & Fire plan at $141.9 million and West Warwick’s at $121.8 million.

Funding levels last year increased for each of those municipalities, showing a slight move toward fiscal stability, unlike plans in other cities and towns, including Johnston police and fire, Lincoln, and Woonsocket police and fire. Funding levels, albeit much higher than for plans in critical condition, fell among some noncritical plans, including for East Providence firefighters and police, Jamestown police, Little Compton town employees and Newport police, according to the state municipal finance website.

The noncritical plans – those with funding levels greater than 60 percent of the obligation – have some leeway, as the cities and towns are not reprimanded unless they fall below the 60 percent funded level. But the falling rates are worrying to union members who feel contracts are not being honored.

“This is just going to be addressed when it all fails,” said Detective James Brady, president of the International Brotherhood of Police Officers Local 307 in Johnston.

Johnston has combined its police and fire pension plans, which are funded at 20.2 percent and 27.5 percent, respectively. But the funded ratio is trending downward, and Brady estimates that unabated the plan could go bankrupt in eight years. (The state could not confirm his estimation.)

Brady points out that this isn’t just a union issue because at some point the bills will have to be paid. And unless municipalities are able to curb these rising costs, taxpayers – both residential and commercial – will have to start picking up the tab.

“At some point it’s going to affect real estate taxes,” Brady said. “There’s been a promise made. Who’s going to pay? The taxpayer is going to pay, there’s no one else – unless the federal government is planning to bail us all out. It would be on the taxpayer. Just look at Providence.”

Nearly 70 former Providence employees filed a suit against the city in 2013 rebuking the changes to the city’s pension plan, which led to Taveras’ April Superior Court testimony. Cranston retirees are fighting a similar battle against Fung in their own “opt-out” case. Superior Court Judge Sarah Taft-Carter is expected to make a decision on both cases soon, which could set important legal precedent for future negotiations between municipalities, union members and retirees elsewhere in the state.

Providence – like other municipalities – will have more discussions with its union members and retirees to try and win further concessions. A recent National Resource Network study showed benefit costs in Providence crimping the city’s ability to use money effectively in other areas.

“The opt-out case is very significant,” Smiley said. “We’re not waiting for a decision to start discussions … but we do recognize that the case shapes the conversations.”

Fung, who along with Hoyle sat on the pension and OPEB commission, has watched Cranston and neighboring cities and towns grapple with these issues. He’s disappointed that none of the commission’s recommendations has translated into action at the state level.

“Since the commission disbanded, I haven’t had any updated data,” he said. “But in my opinion, the locally administered plans were in desperate need of reform.”

Raimondo, a Democrat who topped the Republican Fung in the 2014 gubernatorial race, echoed the state-commissioned report, saying “the status of these local funds is both severe and urgent.” But she added there was no “immediate liquidity crisis among the municipalities at this time.

“The municipalities have time to address their pension [and] OPEB liabilities, but it would be prudent that they do so with urgency,” Raimondo said. “My administration is not waiting for a crisis.”

To date, no legislation stemming from the report has been proposed by either the General Assembly or the governor, which Fung says is disappointing because it means those recommendations “are just sitting on a shelf somewhere.”

Raimondo, who received national acclaim for R.I.’s reform of state-worker pensions, said she’s tapped Hull’s expertise to “help untangle the complexities of the local pension [and] OPEB matter.” She said she’s charged him with evaluating the report and developing a plan for the “next phase of pension reform.”

BUSINESS IMPACT

Sandy K. Baruah, president and CEO of the Detroit Regional Chamber of Commerce, watched his city go through the largest municipal bankruptcy in U.S. history.

The city had a plethora of financial issues, but among the driving factors that led it toward insolvency were program costs for retiree health care and pensions. The same issue is being played out today in Chicago, where the city has the highest burden of unfunded retirement benefits in the country, according to Moody’s Investors Services.

Leading up to Detroit’s 2013 bankruptcy, however, Baruah and his Chamber were actively advocating in favor of going that way, because Baruah says it allowed the city to do two things: continue to deliver basic city services and send a positive signal to outside investors.

“The pace of improvement has certainly picked up since bankruptcy,” Baruah said.

Bankruptcy allowed the rest of the world to know that Detroit was finally serious about addressing its problem, which was important for both the business community inside and outside of the city.

John C. Gregory, president and CEO of the Northern Rhode Island Chamber of Commerce, echoed the sentiment, saying financial stability is key for business owners because it signals that a municipality is effectively using its money. He sees this happening in Central Falls, which filed for bankruptcy in 2011. Leaders there have been trying to shore up finances and bolster business activity. For fiscal 2017, Central Falls Mayor James Diossa has proposed freezing the commercial rate and lowering property taxes for the first time in a decade.

“None of these folks created the problem,” Gregory said of the city’s current leadership. “It’s almost like they found the corpse, but not the murder.”

Business owners – by and large – don’t pay attention to how unfunded obligations are each year. Like residential taxpayers, business owners are largely concerned with how much the real estate tax changes at the local level and what they have to pay in state and federal taxes. They are much more concerned with the consistency of basic city services, including walkable sidewalks, drive-able roads and having the police show up when they dial 9-1-1, say Gregory and Beardsley. Because these services were not disrupted in Central Falls, Gregory says there wasn’t an exodus of residents after the city filed for bankruptcy.

Peter Fuller, president and owner Fuller Box Company Inc., based in Central Falls, says that besides a mandatory 4 percent increase in property taxes immediately following the city’s bankruptcy, not much has changed for his company. He employs between 200-300 people in Rhode Island and Massachusetts depending on the season.

“If it was 1994 and Central Falls was going into bankruptcy, I would have thought twice about moving here,” he said. “I would want to see the economic ramifications. But having gone through this bankruptcy I have never thought about moving.”

Looking around the country, however, Baruah believes everyone – residential and commercial taxpayers – should be paying attention to municipal finance before it’s too late.

“Detroit showed us that municipal finance is a ticking time bomb all across the country,” Baruah said. “Finances of local governments are in crisis … and no one wants to address it until you’re halfway behind and your hair is on fire.” •

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1 COMMENT

  1. Impressive journalism. This is a huge issue. Underfunded pensions are a slow-motion train wreck waiting to take the R.I. economy down. We need more in-depth, comprehensive conversations like this one if we are going to figure out how to deal with this complicated issue.