Long-term obligations drag on Providence finances, despite surplus

THE PENSION plan in Providence continues to weaken, as its unfunded liability continues to grow while the plan’s funded ratio steady falls, according to data from the Providence Fiscal 2016 Audit, R.I. Division of Municipal Finance and PBN research. / PBN GRAPHIC/ELI SHERMAN
THE PENSION plan in Providence continues to weaken, as its unfunded liability continues to grow while the plan’s funded ratio steady falls, according to data from the Providence Fiscal 2016 Audit, R.I. Division of Municipal Finance and PBN research. / PBN GRAPHIC/ELI SHERMAN

PROVIDENCE – Despite ending fiscal 2016 with a $10.3 million budgetary surplus, long-term obligations continue to paint a dreary financial picture in Providence.

The city’s unfunded pension liabilities grew 9.4 percent – or $84.3 million – to $985.1 million during fiscal 2016. At the same time, the city continued a long-time trend of underfunding its plan for long-term health care and other post-employment benefits (OPEB).

“Escalating pension and health care costs, the loss of tens of millions in state aid and little tax revenue growth are among the factors that drive the city’s projected deficit over the next five years and beyond,” according to a fiscal 2016 audit released this week.

The city expects its projected $10.3 surplus could expedite a deficit-reduction plan already in place, but the long-term stability of the city’s finances are closely tied to the sustainability of its long-term liabilities.

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Pension and OPEB obligations continue to grow largely because of robust benefit packages and lackluster returns on investment. The city pension fund realized gains of $7.85 million last fiscal year, representing a weighted rate of return (net investment expenses) of 2.6 percent. That’s a far cry from the city’s assumed rate of return of 8 percent, and much less than the $108.2 million the city paid out in pension benefits. The 2016 returns are nearly 40 percent less than the $12.7 million the fund returned the previous fiscal year and 83.3 percent less than the $47 million it returned in fiscal 2014. The plan is now funded at 25.3 percent compared with 28 percent in fiscal 2015.

For OPEB, the city to date has no assets set aside, meaning it realizes no gains in the market. Nonetheless, in calculating long-term liabilities, the city assumes an annual rate of return of 4 percent. The actuarial assumption greatly reduces the plan’s projected long-term liabilities.

The OPEB plan – like most others around the state and country – is set up as pay-as-you go, meaning the city isn’t obligated to prefund any future costs. However, actuaries each year do recommend a set amount the city should put toward its fund in order to combat the soaring long-term costs largely associated with health care. In fiscal 2016, actuaries recommended the city pay $63.6 million toward the plan, of which the city contributed 45.8 percent.

In 2014, the most recent report of funding progress, the city reported OPEB unfunded liabilities totaling $980.7 million with zero assets set aside.

Rising long-term pension and OPEB liabilities weaken city budgets everywhere, as rising yearly costs associated with funding the plans leaves fewer dollars each year to pay for such operational costs as roadway and school building improvements. To cover such costs, municipal leaders are forced to either increase taxes, augment city contributions or renegotiate long ago agreed-upon contracts with unions and individual employees.

In 2015, a state-run commission estimated the combined unfunded amount for 34 locally administered pension plans across 24 Rhode Island municipalities exceeded $2 billion, while the aggregate OPEB liability totaled $3.1 billion, funded at 1.4 percent.