WOONSOCKET — Here’s the $6 million question: Does the pension reform proposal now in the hands of the General Assembly pull the city back from the brink of impending financial calamity?
Here’s the answer: Too soon to tell.
City officials are cautiously optimistic that the legislative reforms proposed by General Treasurer Gina Raimondo will provide relief from what is currently projected to be a crippling increase in state pension costs next fiscal year. But Finance Director Thomas M. Bruce III says the financial forecast depends on what the reforms look like by the time they pass through the wringer of the legislative process and how that translates into dollars and cents for Woonsocket.
“It looks like great news,” said Bruce. “But we really need to see the effect on the budget. We don’t know yet how much relief we’re going to get. Our increased pension costs might end up something less than $6 million, but even $3 million would be too much.”
The magic $6 million figure everyone is talking about represents the city’s share of increased pension costs to the state, in the absence of reform, to cover local employees, current and retired, who are members of the Employees Retirement System of Rhode Island. That’s nearly all of them, save for a group of roughly 220 pensioners who receive benefits from Woonsocket Police and Firefighters Municipal Pension System – a system facing a whole different set of financial problems, perhaps less pressing than those involving the state system, depending on who you talk to.
Barring reform to the state system, the city would have to raise taxes 12 percent next fiscal year just to meet its obligations to the state, according to Mayor Leo T. Fontaine.
The city would be hard pressed to tax or cut its way out of a fiscal hole that deep, the mayor says. The city is already under a state-supervised plan to wipe out $12 million in accumulated debt with a deficit elimination bond, and $6 million in new debt just to address increased pension costs might just be enough to push it over the edge.
Fontaine refrains from invoking the specter of Central Falls or using words like “bankruptcy” to describe the scenario that looms for Woonsocket without meaningful pension reform, but if state legislators do not embrace Raimondo’s plan “it would have a devastating impact on our local budget and on our taxpayers.
“We can’t absorb an additional six million dollars, nor can the school department,” says the mayor.
Raimondo has proposed a combination of reforms, including the elimination of COLAs, or compounded cost of living increases; morphing the defined contribution system into a 401k hybrid; and bringing pension eligibility ages in line with Social Security, among other things. Raimondo and others are vociferously urging the General Assembly to embrace the plan as a whole, saying it will fail otherwise, but legislators already appear at odds over the proposal, and it remains to be seen what a what a consensus plan might ultimately look like.
ASSUMING THE city can surmount the hurdle of its state pension woes, it still faces other serious challenges in getting its municipal pension system into shape.
Like the state system, which is plagued by an unfunded liability, the city’s system has the same problem, just on a smaller scale. The state’s unfunded liability – that’s an actuarial figure representing the sum total of its obligations to potential beneficiaries – is over $9 billion. For the city’s system, it’s just $42 million, or about 39 percent of its total projected obligation of $107.7 million, according to Bruce, citing a July actuarial report with the latest available figures.
Many of the state’s cities and towns, including Cranston and Providence, have similar problems, if not worse. Their mayors, as well as Gov. Lincoln Chafee, have urged Raimondo and the legislature to deal with the municipal pension issue in the context of the proposed reform package, but local officials seem disheartened by the extent to which it appears to do that.
Richard Lepine, a Cumberland investment advisor and a member of the city’s Investment Advisory Board, says that in some respects, the reform proposal stands to worsen the city’s overall fiscal woes. Basically, it calls for troubled pension plans to submit to increased state oversight, with the possible suspension of state aid for those that fail to adopt approved recovery plans.
“I don’t think this will really address the city’s pension problem,” he says. “I think it forces the cities to solve their own problems. It certainly could make them worse.”
The city’s pension system for police and firefighters is unique, even compared to other municipal plans.
In 2003, the city borrowed $90 million to fully fund the system under the authority of a special law the General Assembly passed just for Woonsocket.
The plan was fine while the bond proceeds were invested in a booming stock market, but the bottom fell out when the Great Recession came along, taking huge bites out of the investment principal.
Since at least 2009, the city has been out of compliance with a key contingency of the enabling legislation that permitted the city to borrow the pension bond, n
amely, that the plan always be fully funded, even if taxpayer-raised capital is needed to reach the threshold. Even spread over five years, as the law requires, the current minimum to achieve compliance would be about $8 million a year, but the city put only $1 million in the fund this year because it can’t afford any more.
Bruce says the biggest threat posed by this pattern of fiscal behavior is to the city’s bond rating, which is already at junk status. It won’t improve – and may even be vulnerable to further downgrading – unless the city adopts some sort of concrete plan to show how it intends to address the unfunded liability of the city plan.
Right now, Bruce says, the city won’t be able to afford an increase until it pays off the deficit elimination bond, which is costing the city about $2.9 million a year through 2017.
Lepine strikes a somewhat more urgent tone. At its current rate of payout to beneficiaries the plan will soon need an infusion of capital to prevent a disastrous erosion of its operating principal.
“It’s going to be spiraling down rather quickly,” he says. “The city has to put new money in, somehow, some way.”