Providence’s pension crisis has its roots in the late 1980s. That’s when the city’s Retirement Board approved unusually generous compounded cost of living adjustments for more than 2,500 city workers and retirees. Decades later, that move helps explain why there’s a $1.2 billion gap between the pension balance and the amount owed to current and future retirees.
The pension crisis has defied attempted solutions for years. Providence officials say the city has just 22% of the money needed to meet its long-term pension obligations. And the amount of the city budget consumed by the pension is growing 5 percent a year, to about $93 million currently. Without a change, that annual payment will rise to $227 million by 2040.
Mayor Jorge Elorza said these pension costs are unsustainable.
“It’s only a matter of time before they continue to squeeze everything else out of our budget, so that we’re cutting deeper and deeper into the bone,” he said during a recent news conference.
Elorza’s plan involves selling $704 million in pension obligation bonds. The idea is that these bonds could generate enough of a return to boost the pension system’s funding to more than 60 percent.
Governor Dan McKee on Tuesday weighed in on two critical issues facing Providence: shakeups in contract negotiations with the teachers union and Mayor Jorge Elorza’s plan for a pension obligation bond to throw the city a financial lifeline.
On Elorza’s idea for a $704-million pension obligation bond to address the city’s unfunded pension liability, McKee raised skepticism, suggesting the plan is risky and that the timing isn’t right.
“I think it’s rolling the dice,” he said. “And again, I’ll reflect back to the time I was a mayor. I made sure that there was actuaries that supported any decision made in our local pensions including the police pension. I haven’t seen any actuaries that I would rely on. I’m not sure there’s time right now between now and the end of session to do that in a way that I would feel comfortable with.”
Red flags waved as Providence Mayor Jorge Elorza proposed issuing $704 million in pension obligation bonds to deal with a pestering unfunded liability problem in Rhode Island’s capital city.
The amount exceeds the city’s annual operating budget. Bond markets often frown on such borrowing and sentiment among state officials who must sign off is uncertain. Skeptics also call the city’s fiscal management track record shaky, while memories linger of a fiasco in Woonsocket, which tried a similar move nearly 20 years ago.
Forensic investigations in Rhode Island, North Carolina, Kentucky and Ohio reveal that gambling 30 percent or more on high-cost, high-risk, secretive alternative investments has exposed pensions to massively greater risks and reduced net returns. The time is ripe for legislators, regulators, and law enforcement to act to stop the looting.
A recent New York Times NYT-3% article revealed that putting more than half of the $62 billion Pennsylvania state teachers’ retirement fund’s assets into risky alternative investments hadn’t worked out well for the pension and had spurred an investigation by the FBI. The FBI is investigating reporting fraud—returns allegedly falsified to avoid increased worker contributions to the pension.
Law enforcement investigations into public pension funds that lie about their returns are long, long overdue.
Since ABC6 first reported last month on discrepancies in pension payments to hundreds of union members in Rhode Island, a retired worker has come forward saying that if the state doesn’t pay him and others what they believe they are owed, there could be a lawsuit.
“They took a lot of money away from us,” the member, who wants to remain anonymous, told ABC6. He is a retired state worker with more than 30 years on the job. He says he’s missing 12 years of wages.
He says after months of back and forth with the Laborers’ International Union of North America (LIUNA) and the RI Department of Administration, a settlement was offered to members for 9 years of lost wages.
NORTH PROVIDENCE – The town’s police pension fund last year gained more than 10 percent, or $4.7 million, says Mayor Charles Lombardi, a huge year for a fund that was once in tatters.
The Breeze reported back in September 2013 that the town’s injection of $20.6 million from the Police Department’s $60 million winnings in a settlement with Google a year earlier had pushed the fund to more than 95 percent funded.
The state’s 2019 report on locally administered pension plans showed that the fund lost about 8.1 percent on its funded status from 2012 to 2018, to 86.8 percent, and that number was about 88 percent last year, said Lombardi. He said the town’s actuary hasn’t completed its work yet, but he’s hoping that funding status could reach 90 to 92 percent with this latest positive news.
Rhode Island’s state pension fund rallied at the end of last year, gaining close to $900 million during November and December alone, to end the year up 11.9% net of fees with a record high asset value of just under $9.5 billion.
The record was set just a month after the Rhode Island Pension Fund surpassed the $9 billion threshold for the first time. The fund gained $303 million in December and nearly $573 million in November. The fund outperformed its benchmark, which returned 11.5% for the year, but underperformed a portfolio comprised of 60% stocks and 40% bonds, which returned 13.5%. The program’s annual assumed rate of return is 7%.
Thought leaders in Connecticut are making waves with progressive revenue solutions of their own. Connecticut Voices for Children released a major report in December, highlighting several tax policy options with the potential to “ensure that Connecticut’s tax system works to advance economic justice rather than continue to contribute to economic injustice.” Those options include: income tax increases on households with incomes over $500,000 ($1 million for couples) that could raise $504 million to $1.72 billion per year; estate tax improvements to reverse cuts and raise $108-162 million per year; a surcharge on capital gains and other similar income to raise $167-334 million per year; and a mansion tax on homes valued over $1.5 million that could raise $331-663 million. These ideas are already being reflected in bills to be considered by lawmakers this year.
Author(s): Dylan Grundman O’Neill
Publication Date: 4 February 2021
Publication Site: Institute on Taxation and Economic Policy