By RUSS OLIVO

WOONSOCKET — The city will have to shore up its pension system for police and firefighters to the tune of $1.7 million next fiscal year, mostly to compensate for market losses in the value of the plan, officials say.

That's just one of the big ticket items members of Mayor Susan D. Menard's administration are to discuss with the City Council tonight as they inch toward crafting a budget for the fiscal year that begins on July 1.
Normally, the City Charter requires the administration to submit a proposed budget to the City Council no later than May 10, or 50 days before the end of the fiscal year. But Planning Director Joel D. Mathews said the city has been unable to assemble a formal package largely because the School Committee had not yet done so.
The latter panel was expected to preliminarily pass a budget last night, however.
Mathews said tonight's meeting does not represent the formal handoff of the city budget to the council. What's planned is a general discussion of problem areas in the still-evolving spending package and various options that might be available to mitigate what it expected to be a significant increase in property taxes next fiscal year, he said.
The mayor tentatively plans to present a formal budget to the City Council on May 21.
“There's a lot of issues,” Mathews said. “How do we address the $3.7 million deficit in the School Department? How do we address the $1.7 million deficit on the municipal side? How do we fund the police and fire pension, which is due $1.7 million?”
Though Mathews allowed that it will take “a substantial tax increase” to balance next year's budget, he declined to ballpark a figure or elaborate on any options the city is exploring to soften the blow.
But Mathews said the budget forecast is further complicated by the recently completed revaluation of city real estate.
While tax rates will change,  revaluation will also trigger two other significant adjustments in the city's multi-tier tax structure, he said.
Currently the commercial tax rate is nearly three times the residential rate of $13.23 per thousand. But Mathews said revaluation will trigger a new state law that restricts the tax rate for any class of property from being more than 50 percent higher than any other.
Another issue is that more multi-family property owners who are currently taxed at lower residential rates will find themselves shifted into the commercial category. Specifically, Mathews said, state law will no longer allow multi-family properties ranging from six to ten units to be classified as residential property. There are nearly 380 houses in the city that will be affected, said Mathews.
Regarding the pension system, Finance Director Ted Przybyla said the capital infusion is required by state law, in part, to maintain the asset value of the plan at a certain level.
In the most recent audit, the USI Consulting Group said the plan lost over $16 million in market value in the year ending July 31, 2008 owing to declines in stocks and other equities in which the plan assets are invested. The initial value of the plan heading into that period was about $94.1 million, the company said.
In what remains a rather novel approach to funding a pension system, the city floated a $90 million “pension obligation bond” in 2002 to wipe out the unfunded liability of the plan. Przybyla says the $1.7 million figure represents the combined amortization of two shortfalls in the plan, including a $5 million gap in the worth of the initial bond that was caused by an actuarial error in calculating the mortality rate of beneficiaries.
Though the city floated a $90 million bond, its actual worth was $85 million, officials say. A portion of the $1.7 million payment will go toward amortizing the $5 million gap over the remaining life of the bond, about 27 years. The balance of the $1.7 million represents the first installment of what auditors call a 5-year “asset smoothing”  to make up for the market-driven decline in the value of the plan.
The plan pays out monthly stipends to 284 retired firefighters, police officers and surviving beneficiaries of ex-public safety workers who have passed on. USI Consultants said the average age of the beneficiaries during the period of the audit was just over 69 years old, and the average monthly stipend, about $2,309.
One financial positive for the plan is that, unlike many other municipal pension systems, the number of pensioners in the city police and fire system continues to shrink. Over  two decades ago, the city began steering new hires to the state pension system. Thus, natural mortality continues to diminish the size of the beneficiary pool.
While the pension plan is one topic up for discussion tonight, the City Council also plans to meet with the School Committee to discuss finances. The School Committee will later convene a special meeting to grant final passage of a School Department budget and to vote on whether to join a “fair funding” lawsuit, compelling the state to adjust its aid formula for urban school districts.
Tonight's meeting gets under way at 6 p.m. in the Second Floor Conference Room at Harris Hall.