Will leaders emerge to avert a looming municipal pension and benefit crisis?

STEPPING UP: From left, Gov. Gina M. Raimondo, North Providence Mayor Charles A. Lombardi, General Treasurer Seth Magaziner and Cranston Mayor Allan W. Fung have all spoken about the state's need to address unfunded municipal pension liabilities and OPEBs.
STEPPING UP: From left, Gov. Gina M. Raimondo, North Providence Mayor Charles A. Lombardi, General Treasurer Seth Magaziner and Cranston Mayor Allan W. Fung have all spoken about the state's need to address unfunded municipal pension liabilities and OPEBs.

Editor’s note: This is the fourth and final installment in a series exploring how well Rhode Island cities and towns are funding municipal pension and benefit plans and the public-policy ramifications.

Hours after a Rhode Island Superior Court in July ruled in his favor in a long-running case concerning municipal retiree benefits, Cranston Mayor Allan W. Fung ruminated on what it would take, statewide, to provide relief to communities.

And who would take the leadership role in that.

“It takes a lot of political courage on many people’s parts to address this next looming crisis so it doesn’t get to a point where it’s this next albatross that’s hanging out there, like the [state employee] pension crisis,” Fung said.

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In the court case, Fung is defending what he considers the right of a local community to make cuts to long-ago promised pension and health care benefits that can no longer be sustained. It would be an easier burden if the state, through the General Assembly, would take a strong position that this is an appropriate action for local communities, he said.

“It would be a much better, and stronger, case for a municipality if we had the state recognition, through enabling legislation, to suspend or freeze [cost-of-living adjustments],” he said.

COMMON BURDEN

The state’s cities and towns share a common burden in how to pay for benefits promised years ago to municipal employees and retirees.

Many of the communities administer their own pensions for retired employees, which are funded to varying degrees of actuarial soundness. While some are adequately funded, statewide the unfunded liability for local pension plans, across 24 communities, exceeds $2 billion.

In addition to pension plans, towns and cities are administering post-employment benefits, such as continuing health care coverage, for retired workers. Across the affected communities, the liability is estimated at $3.1 billion for those benefits, known as other post-employment benefits, or OPEBs.

Those plans, in the aggregate, are funded at a mere 1.4 percent, according to a state commission report issued in 2015.

While pensions and benefits for state employees were reformed by state leaders in 2011, and millions saved, local plans and benefits were left on the table. It wasn’t for lack of trying, said former Gov. Lincoln D. Chafee, who said he couldn’t get any political traction for legislative packages that would have offered communities more flexibility in reducing the burden.

It made no sense to leave it out, he says, given the financial situation faced by communities.

“It was just pure common sense and arithmetic,” he said in a recent interview. “If you saw the unfunded liability of the state and compared it to some of the municipal plans, it was just obvious the local plans were in much worse shape than the state.”

In some communities, the plans were funded as poorly as 17 percent, he said.

But in 2011, and the following year, he couldn’t get political support for state reform to provide local flexibility.

“It was so hard,” he said. “I couldn’t get the business community behind it. It was very perplexing. Common sense, trying to fix Rhode Island. They just didn’t seem to understand the crisis.”

Four years later, he still doesn’t see any evidence of further understanding. Although he was focused on pensions, Chafee, a former Warwick mayor, said he was also aware of the simultaneous problems that communities had in funding OPEBs.

The state, he said, needs to work with cities and towns and help them resolve the issue.

“It’s one of those sad circumstances of, when it explodes, they’ll deal with it. Total collapse,” he said.

Fung, who has taken a visible role among community-based leaders in Rhode Island in trying to address pension and OPEB benefits, described the latter as an “albatross” with the potential to weigh down communities.

But in a state where unions still wield political clout, getting those concessions can be difficult.

Pensions are more easily understood, he said. OPEBs? Most people probably don’t know what the acronym means. Fung recalls his constituents having difficulty grasping the enormity of the numbers involved, and how it might affect them.

“When I would start talking, when I talked to normal residents about the pension problem, they just shut down. When I was talking about our pension liabilities, [about] $260 million. They can’t grasp even tackling a problem of that magnitude.”

Cranston took on the issue of pension reform at the local level years ago but still has an unfunded level in its plan that troubles Fung. His effort to reform the city’s troubled pension plan had largely been resolved out of court. But a small group of public-safety employees had opted out, instead challenging the right of the city to reduce previously agreed-upon pension benefits, such as cost-of-living increases.

When a judge determined Cranston could do just that, the city became the first in the state to withstand a court challenge over reduced pension benefits. The victory was short-lived. A week after the determination, the retiree group announced it had filed an appeal with the state Supreme Court.

WHO WILL LEAD?

Who ultimately should be taking a lead role in resolving the funding shortfalls?

John Simmons, executive director of the Rhode Island Public Expenditure Council, said the General Assembly historically has not opted to get directly involved. “They’re less inclined to get involved in local governance of this issue.”

Previous attempts to secure so-called “municipal choice” legislation, which would lessen the influence of collective bargaining, and give municipalities choice in what benefits to offer, have failed.

In fact, proposals have been introduced – although not approved – that would extend the length of expired contracts, in effect continuing the employee benefits.

Fung thinks the responsibility rests with a shared burden between state and local communities, with the locals taking the lead, armed with new tools that could be created at the state level. New tools would essentially provide community leaders with more ammunition in exacting change to contracts that dictate the terms of the plans.

For example, he said, communities need enabling legislation to encourage employee concessions on both pension and OPEB costs. On pensions, he said, he’s advocated for statewide authority to allow cities and towns to reduce or eliminate COLAs in pensions.

As for OPEBs, in some cases, he said, local plans for post-employee benefits not only include the worker who retired, but his or her spouse and children. Communities that determine they can’t afford to sustain that should also have authority to reduce that burden, he said.

But, as opposed to state-level pension reform, town- or city-administered plans are approved contractually, or made a part of ordinances. That makes changing them difficult.

“It can’t just be mandated at the local level, because they are tied into contracts or ordinances,” Fung said. “What you can do is provide enabling legislation. In the pension context, it was to freeze [cost-of-living allowances]. In the context of OPEB, it is to either not have retiree health care as an option, or making the scenario so that instead of a family plan, providing single coverage for the individual, who was the worker.”

Without the state’s recognition that such legislation is needed, it’s a back-and-forth at the negotiation table with employee unions. “You need them to recognize the scope of the problem,” he said of state officials and legislators. “Recognize that municipalities need some help from the state, to help address the problem.”

Easier said than done.

In January 2015, a 14-member, statewide commission that looked into the issue released a lengthy report and a set of recommendations. Led by former R.I. Department of Revenue Director Rosemary Booth Gallogly, the commission met 39 times over the course of two years before releasing 11 recommendations to the General Assembly and the then-newly seated Gov. Gina M. Raimondo.

Specific recommendations included establishing an oversight board, which wouldn’t have the power to determine benefits, but would require communities to follow best practices and financial standards.

The state could also require a fiscal-impact statement, which would include a cost estimate for contract changes, including pension and OPEB items, ensuring a long-term analysis of immediate changes.

Another recommendation would have stepped up notification requirements of the fund performance, including funded status, to all plan participants and oversight board members.

Since then, however, little has happened at the state level.

Raimondo was elected governor in 2014, after shepherding comprehensive pension reform for state employees through the General Assembly. But beyond directing Department of Revenue Director Robert S. Hull to look into the commission’s recommendations, she has not made local pension or OPEB reform an immediate priority.

Raimondo did propose, and the General Assembly approved, creation of a Municipal Finance Transparency Portal, which will create a standardized and uniform repository for financial data from the state’s cities and towns, including data on the cost of local OPEB plans, according to spokeswoman Marie Aberger.

“This work was a direct result of the study commission’s recommendation to continue and improve the state’s monitoring of these local plans,” she said.

In an emailed statement, Raimondo in July said the status of the pension and OPEB funds is “both severe and urgent but, to the best of our knowledge, there is no immediate liquidity crisis among the municipalities.

“My administration is not waiting for a crisis,” she wrote. “The short-term strategy is for the Division of Municipal Finance to increase its monitoring, partnership and transparency efforts.”

Hull, she noted, would evaluate the commission recommendations and develop a plan for the next phase of pension reform. Any actions proposed would be “arrived at in partnership with the municipalities, their employees and retirees, taxpayers, the General Assembly and others who have a stake in an equitable resolution.”

Fung was a member of the 14-member commission. He is disappointed nothing tangible came of that work.

“It is certainly disappointing to me that it’s been sitting on a shelf,” he said.

Other community leaders say it really should be the task of local communities to handle their finances, including long-term liabilities.

Charles A. Lombardi, mayor of North Providence, leads a community that succeeded in fully funding its pension liabilities by applying the proceeds of a settlement from Google.

The money, $20.6 million, was the reward for local police helping a federal investigation into the company’s distribution of ads for illegal prescription drug sales, according to a news release.

Both North Providence and East Providence received settlement money through the case, and later sought and received federal approval to apply the proceeds to their unfunded pension liabilities.

As for outstanding OPEB liabilities, North Providence has made regular payments on that amount, which Lombardi estimated at $62 million. But because the city created its own trust fund for that unfunded liability, it has been rewarded with increasing yields. “This town is on the road to recovery. We’re taking care of this,” he said.

He doesn’t think the state should create any “overseeing” board or authority, unless it is willing to provide local leaders with funds to help reduce long-term liabilities.

“If you want oversight of us, help us,” he said.

Dan Beardsley, executive director of the Rhode Island League of Cities and Towns, doesn’t see that happening.

He can’t see the General Assembly getting involved, he said, in overseeing local retirement or benefit plans that it had no role in creating.

For cities and towns, it was difficult enough to get the Financial Improvement Plans approved, which were a requirement following the 2011 overhaul of state pensions for those communities that had local plans that were insufficiently funded.

Specifically, the communities whose plans were in “critical status,” or funded less than 60 percent, had to show how they would achieve funding at least at that level by 2033.

Now they have to make good on the payments, Beardsley said.

“The fiscal discipline needs to take place,” he said.

GROWING AWARENESS

In the absence of comprehensive reform measures, some steps are being taken at the state level to make the public, and community leaders, more aware of the issue.

Sen. Ryan Pearson, D-Cumberland, is the primary sponsor of legislation approved by the General Assembly this year that creates a five-member advisory council that will have oversight of and report on the status of local pension plans. The committee has yet to meet because two members, representing organized labor and municipal interests, have not yet been appointed by Raimondo.

Pearson, a bank executive who has a degree in finance from Providence College, had followed the work of the 14-member pension and OPEB commission, which had been created under Chafee, Raimondo’s predecessor.

Pearson was concerned that $5 million provided annually in state funds to entice communities to support the work of making their pension plans sound, by meeting the required annual contribution, had not been continued in the current fiscal year’s budget. This removed an enticement for local compliance, he said.

So, the motivation for forming an advisory committee was to keep a focus on the issue, he said. “The big push this year was that municipal incentive aid was no longer going to be in place,” Pearson said. “Without that, the need for oversight was even more than in past years.”

“In some communities, there were very thorny issues the locals were forced to work through if they wanted the incentive aid. It served its purpose,” Pearson said.

General Treasurer Seth Magaziner will be the chairman of the new committee. Its purpose is more broad than the 14-member commission.

As part of the legislation, the committee will publish a dashboard, containing comparative information on the various local pension plans, to include information on fund performance.

Rates of return, the capacity of a community to pay its annual required contribution, which is the annual payment to a pension or post-employment benefit fund as a percentage of what the community raises in taxes, are expected to be included, and made available to the public.

Why does that matter? Funds that perform better over time are better funded in general. The public will be able to see that in one place.

The comparative data for locally administered plans also will show which communities have the greatest burden in making the payments. In some, it’s significant, Pearson said, based on the overall revenue.

The results, including a report on the sustainability of each plan, will be published annually.

“I think municipal leaders will be very responsive,” he said. “If I were a mayor, I’d be looking for the general treasurer to issue me a clean bill of health.”

As Raimondo did before him on statewide pension reform, Magaziner wants to take a direct role in helping local communities address the deficiencies in their plans.

“The role of the treasurer’s office is to promote financial stability at all levels in Rhode Island,” he said. “There’s no doubt that local pensions in certain communities represent one of the most profound challenges the state has.”

Why is it a state issue? Municipalities that fall into financial crisis may seek state help, and indirect impacts also exist, such as poor investments in education and infrastructure, Magaziner said.

In addition to the collection and publication of comparative data, he said the state may try to encourage communities to fold their pension plans into the Municipal Employee Retirement System, a state-administered plan run through his office, which would offer economies of scale and professional management.

For local communities, however, a negative aspect to that is it requires the annual contribution. If a community doesn’t pay, the state could take action to require a payment, including asking a court to impose a tax. That has happened only once recently, involving the Coventry Fire District in November, he said, and is seen as an extreme example. The case is expected to be withdrawn, according to a Treasury spokesman, as the fire district recently came forward with a plan to make the payments.

Rhode Island has 113 local pension plans in the state-administered system. The funding was at nearly 84 percent as of Dec. 9, 2015, according to an actuarial valuation report, prepared by Gabriel Roeder Smith & Co. At that level, it is more fully funded than most local plans, said Magaziner.

Another potential disincentive for some local communities: To join the state- administered plan, the local pension plan would have to abide by the same benefits. Local employees may see this as less advantageous.

“In some cases, the benefits are more attractive at the local level,” Magaziner said.

While the committee is not expressly allowed to consider OPEB information, another bill authorized this year allows the state to track and publish information on local municipal debt levels, which could be seen as including benefits promised to retirees.

“As I think about the role of the committee, it’s to continue and sharpen the work of the previous commission,” he said. “We need to produce tools that are more useful and more concrete for municipalities that are dealing with this issue.” •

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