When Rep. Charlene Lima recently introduced legislation requiring that municipalities contribute two percent annually to their pension plans she had one thing on her mind.
The Cranston Democrat wanted to prevent situations like what is happening in her city – where there is an estimated $170 million shortfall in the police and firefighters pension fund.
“It seems to me that we need to force cities and towns, especially those that are requesting the legislature to pass bills that would allow them to go out to bond, to set aside money for these funds,” she said. “We need to stop the problem before these cities and towns are so much in debt that the state has to take over.”
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But some experts feel the legislation is too broad and fundamentally can’t address the issues that has at least three cities seeking General Assembly approval to bond out the hundreds of millions of dollars in deficits they face. The city of Woonsocket, which has already obtained that approval, is scheduled to ask its voters on April 30 whether it should sell $90 million in pension liability bonds.
According to Peter Marino, of the Rhode Island Public Expenditure Council, there are at least a dozen communities around the state facing some kind of unfunded pension liability, meaning they don’t have enough money to cover the costs for retiring police and fire workers. The highest, he said, is Providence, which is short almost $480 million.
Every community in the state has some form of pension plan, said Dan Beardsley, executive director of the Rhode Island League of Cities and Towns. Some, he said, are under the state system, while others are privately funded. In addition some funds have been deemed over-funded, meaning at this time the plan has enough resources to pay out all needed retirement benefits, and some are under-funded, resulting in a liability.
Most of the problems, he said, have come with the private plans.
“Many times communities with private plans found themselves under a great deal of pressure to spend money on other things,” he said. “They may have needed a new addition to a school, or new fire equipment and as a result contributions to the pension plan may not have been as high as they wanted. When those contributions aren’t as high or at the level they need to be, it increases the unfunded liability. Over a number of years, it can be a problem.”
To compensate, many communities like Woonsocket have been operating on a “pay as you go plan,” which is expected to cost the city $5.2 million this year and more than $6 million next year.
Woonsocket, which switched its police to the state pension plan in 1980 and its fire in 1985, is working only to cover the pensions of people hired before those dates, which Woonsocket Mayor Susan D. Menard said numbers about 300.
“We have to pay as you go,” she said. “It’s a very practical solution to the problem.”
But it’s only a temporary solution, and for Menard it is the last black mark on the city’s credit record.
“Right now it’s the only issue that we have in our management letter (a list of concerns from outside auditing groups),” she said. “What’s frustrating is that no matter what we have done, we have always had this bill. That’s why I think the bond funding is so important.”
Paying off one debt with another comes with its own set of risks, Marino said. With bond funding communities are in essence acquiring more debt because they are investing the money they obtain through these pension obligation bonds at a higher rate than it cost to borrow, and then using the return on the investment to pay down the liability over time. He said the risk is that the city won’t see a return on its investment and will instead face another loss. In addition bonding restricts a community’s spending flexibility.
Menard doesn’t see it as a great risk.
“We can use the interest earned on the investments to set the costs the city is obligated to for the next 50 years,” she said. “Our (bond proposal) is very tight, very conservative. We have a tremendous amount of safeguards and there is no way to deviate from the payment schedule or use the funding for something else. This is the most financially prudent way of addressing this issue.”
The city of Cranston, which moved its pension plan over to the state in 1995, is also looking to cover its $180 million deficit though bonding, as is the city of Providence.
But Marino warned that bonding isn’t a quick fix.
“There are other solutions, but none of them is easy,” he said. “And for cities like Cranston that is also facing a cumulative deficit of $15 million in annual budget, bonding could be creating another debt.”
Rhode Island cities and towns aren’t the only ones that must deal with unfunded pension liability issues, Beardsley said. It’s just a problem that gains more exposure here.
“One of the things that people forget is that we have a history of almost 40 years of collective bargaining for state and local employees, whereas the advent of collective bargaining has come about more recently, within the last two decades, in other states,” he said.
In addition, Beardsley said unfunded pension liability isn’t an issue that’s going away.
“There will always be unfunded liabilities when in comes to anyone’s pension,” he said. “The question becomes when does that pension system change from one with enormous unfunded liability and an unsound financing system to one that would still have unfunded liability but have an actuarially sound funded financing system.”
