With talk of pension reform reaching a fevered pitch in the state, members of Woonsocket’s investment board met with the city’s administration and council members to discuss the city’s own pension obligations.
The meeting was a sobering look into the increasing cost of pension obligations on a city-run plan beaten by a volatile stock market that encompasses 276 former and current Woonsocket police and firefighters.
The actuarial report, which was delivered to the city on April 29 notes that the city as of July 1, 2010 has a projected benefit obligation on the plan of $97,860,965. The actuarial value, or value taking into account future contributions, mortality rates and disability rates, of the current pension account is $67,641,077. The market value of current assets is $56,379,854.
The figures put Woonsocket’s total unfunded liability on their pension plan somewhere between $30 - $40 million.
“This [actuarial report] is really indicative of the problem we face with the pension fund,” said Mayor Leo Fontaine.
The city also faces a 6 percent interest rate on the $90 million pension bond that was taken out in 2002 to pay for the pensions over the next 30 years.
The pension account is nearly closed at this point because there are only six active employees still contributing to the plan; 208 are retired, 54 are disabled.
The report recommends that the city contribute $2,775,469 per year to fully fund the plan.
The city contributed $0 of the $2.7 million recommended last year, contributed $1 million this year and has budgeted $1 million next year.
“Last year was 0 on the 2.7, this year is a million, next year is a million,” said John Ward, City Council president.
“We’re already about $8, $9 million behind the eight ball on putting money back to make up for market losses,” said Ward. “We’re completely heading in the wrong direction here.”
The report says that from 2007 to 2009 the fund lost $37,769,627 in the market due to the recession.
Despite these losses, the city’s actuary, Dennis Jacobs, stood by an 8.25 percent discount rate (or rate of investment return.)
“I would like to suggest that the glass is a little more half full, at least from a discount rate perspective,” said Jacobs, “I think 7.5 percent is frankly borderline conservative and 6 percent is much too conservative.”
On Monday State Treasurer Gina Raimondo said that lowering the discount rate of the state’s plan from 8.25 percent to 7.5 percent was closer to “reality” and that the discount rate may be reduced further. In her report, “Truth In Numbers” she noted that the state used a discount rate over the last decade of 8.25 percent, but the actual rate of investment return was 2.28 percent, which contributed to the massive unfunded liability the state pension plan faces.
Richard Lepine, an investment board member, said in response to Jacobs’ stance, “I don’t see any scenario, I don’t see any situation where we come close to meeting that rate.”
“We’re paying out virtually in distribution and pension benefits 13 or 14 percent of our funds every year,” said Lepine, adding that it works out to around $7 million per year. “There is nothing historically that anyone can point to, to even wish that the amount of money in this pension fund is going to come close to paying people.”
“The failure rate is virtually 100 percent,” Lepine said.
Many officials at the meeting considered consolidation with the state plan as the best option for the future of the city’s pension plan.
Fontaine recommended getting the fund back on track and then approaching the state to determine what options the city would have in order to bring their funds into the state’s plan.
Roger Begin a former Lt. Governor and General Treasurer of Rhode Island who now chairs the Woonsocket Investment Board, said “The city should get out of this business, it should go over to the state as much as possible.”
“The eye on the ball, again, is a state takeover of the system,” said Thomas Bruce, the city’s finance director.
Lepine warned that with the high discount rate it will be important to get into the state's plan as quickly as possible in case the market nosedives.
“I’m assuming at some point the discount rate is going to lower again, so the longer the city waits for the state to absorb this rate, the more expensive it’s going to get for the city,” said Lepine.
Fontaine said he made an offer to the state’s treasurer, Gina Raimondo, to enter a pilot program if she was willing to bring in municipal pension systems into the state system.
Raimondo said on Monday that, “One of the things that I think needs to be considered is a consolidation, to take those pension systems that are outside the state system and bring them into the system and that’s one of the options that I think we need to explore.”
But with Raimondo presenting significant reforms to the state pension system it may be impossible to consolidate municipal plans that have been contracted. The state legislated their benefits with their unions whereas cities have negotiated them. Raimondo believes that the state can legislate its way out of its poor decisions, but cities, which are under contract, may have to negotiate their way out.
“We can’t change the system we have, we have to simply pay for it,” said Ward regarding the unlikely scenario of being able to negotiate their way out of the city’s pension obligations.