WOONSOCKET – The latest actuarial data confirms that the financial condition of the city’s locally-administered pension plan for police and firefighters meets the state’s definition of “critical” because its assets have dipped below 60 percent of its liabilities to pensioners.
The data from USI Consulting means the city is no longer exempt from having to file a Funding Improvement Plan to the state Department of Revenue under a law passed last year by the General Assembly.
Yesterday afternoon, the Budget Commission did its legal duty, voting 5-0 to advise the DOR of its plans to incrementally wipe out the unfunded liability of the pension system, in part, by eliminating cost of living adjustments (COLAs) to beneficiaries.
Woonsocket now joins 14 other communities that have already submitted FIPs to the DOR for 18 different plans that aren’t part of the state Municipal Employees Retirement System, or the so-called non-MERS plans. USI says its latest analysis indicates the police and firefighter pension system is funded at 56.76 percent of its accrued actuarial liability as of June 30, 2012.
With the panel facing a June 1 deadline to satisfy the DOR mandate, yesterday’s action by the commission was largely a legal formality. The state-appointed panel has already adopted the proposed rollbacks in the pension system as part of a five-year plan to wipe out a deficit that was, until recently, on track to reach about $105 million by 2017. It has also asked the General Assembly for permission to overhaul the plan, using the same benchmarks proposed in the FIP.
In addition to the pension reforms, the city is also seeking concessions from labor, a $2.5 million supplemental tax for 2013, a sharp cutback in the homestead exemption, new trash fees and a regularly scheduled, 4 percent hike in taxes – the maximum allowed by law – to make ends meet. The commission is predicting to end the current fiscal with a deficit in the range of $10 million if all goes according to plan.
The USI report says the reforms adopted by the commission will result in a net savings to the city of close to $40 million during the next five years, the combined result of eliminating COLAs and providing the city with more time to eliminate the unfunded liability by adding cash to the plan.
The city has long struggled to fund the plan, which represents about 250 police officers and firefighters who were hired before 1985. Although pensioners or their spouses are still receiving benefits from the plan, and are expected to continue to do so for many years, the plan has been closed since that time, when new hires were steered to the state pension system.
In 2002, the city fully funded the ailing pension system essentially by floating a long-term bank note – a difficult-to-obtain loan of $90 million known as pension obligation bond, or POB. The city needed the approval of voters to do so, and though POBs were controversial and relatively rare, the POB passed by an overwhelming margin.
Another obstacle between the city and the POB, however, was former Gov. Lincoln Almond. Though the General Assembly allowed the city to seek a POB by passing the necessary enabling legislation, Almond initially vetoed the measure, citing the financial risks. The city renewed its request to lawmakers a year later, and the bill passed with an assortment of conditions, including a requirement that the city “cure” any unfunded liability within five years by putting local revenues into the plan.
For a time, the plan was financially sound, but with most of the assets invested in stocks and bonds, the market crash of 2008 caused the unfunded liability of the plan to balloon.
For the last several years, that burden of making the plan whole has been far more than the city could afford. USI, for example, says the one-year mandatory payment would be in the range of $11.3 million for each of the next five years if the law remained unchanged. In 2013, the city budgeted just over $1 million to cover the gap, a fraction of the required minimum.
The city is now asking the legislature to stretch out the payback window from five years to 16. That would reduce the one-year burden from $11.3 million to $3.5 million per year, according to USI. The FIP would fully fund the plan by 2029.
The FIP assumes a return on investment rate of 7.5 percent, which is three-quarters of a percent less than the existing plan. In today’s market, some would call that optimistic, but USI says that in combination with the elimination of COLAS and restructuring the payback window from five to 16 years would immediately allow the plan to emerge from critical status.
In addition to legislation from General Assembly, which is pending approval, the commission has still not obtained another important ingredient needed to enact the proposed reforms: the consent of pensioners.
“The major plan change under this scenario is the elimination of all future COLAs to retirees,” USI says. “The WBC is currently negotiating with the city’s unions.”