PROVIDENCE — The crisis was decades in the making. Warnings were ignored. And now, the City of Providence is facing $1.2 billion in potentially crippling pension debts.
The same warnings were sounded, almost verbatim, about the state-run pension system in 2011 when then-state Treasurer Gina Raimondo launched her winning campaign for massive reforms.
Is the City of Providence seeking legislative go-ahead to paper over decades of over-the-top pension giveaways — with $515 million in borrowing — without the same level of reform?
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It depends on how you measure reform. But this much is certain:
On Jan.1, 2023, the city is scheduled to resume 3% compounded annual cost-of-living increases for many of its 3,250-plus retirees, a practice suspended for a decade after Angel Taveras took office as mayor and declared a “Category 5” financial hurricane.
Some retirees will get less. But about three dozen retirees from the city’s police and fire ranks who opted out of a settlement will get 5% or 6% compounded COLAs, according to city spokeswoman Theresa Agonia.
The net result?
The required city contribution will jump by 7.1%, from $93,585,059 this year to a projected $100,323,373 next year. Lest there be any doubt: the surge reflects the resumption of COLAs, according to information provided by the city.
By way of comparison: state employees, teachers and many other municipal employees get pension increases once every four years. The last was 1.06%, and that only applied to a portion of their benefit.
They will not see the return of annual COLAs until the state pension system is 80% funded, which is not expected to happen until 2030 at the earliest, according to the state treasurer’s office.
Two groups of retired public employees. Big differences.
But the debate has been focused elsewhere — on the financial risks and benefits if city voters, and the legislature, allow Providence to sell the $515-million “pension obligation bond” city leaders pitched to state lawmakers again this past week.
The advocates’ argument:
Taking out the equivalent of a mortgage to pay off the city’s pension debts will free up tens of millions dollars for essential city services and schools, and prop up a pension system that is currently one of the worst-funded in the nation.
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The alternative?
The city’s annual pension tab will top $200 million “in less than 20 years and peak at $227 million” in fiscal year 2040, according to testimony presented to the Senate Finance Committee. And that could require tax hikes and significant service cuts. The B-word – bankruptcy – was described as unthinkable, but not impossible.
“If not this, then what?” Derek Silva, the lobbyist for the Providence firefighters, asked rhetorically at last week’s hearing.
And that’s the underlying theme of the campaign:
On Friday, three of the city’s major labor unions — the Providence Fraternal Order of Police, the Providence Firefighters Local 799 and the Northeast regional affiliate of the Laborers International Union — reported donating $25,000 each to a public-relations campaign for passage of a June 7 city referendum on the bond.
Called the Committee to Save Providence, the group reported spending $23,491 so far, on field operations and a mailer.
That included $5,000 paid political operative Luis Estrada for field organizing, $3,000 each to four others, and $200 spent at Walgreens for “gift certificates to distribute as raffle at high rises,” according to the filing.
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How did Providence get to the point that pension debts to long-gone city employees threaten to bring the city to its knees?
The simple answer: the generosity of past generations of Providence politicians.
This snapshot helps explain:
Forty-five retirees from the city’s police, fire and municipal ranks are receiving retirement benefits topping $100,000 per year, which means at least $8,333 each month.
All but nine were firefighters. The rest were police officers, according to the most recent rundown the city provided The Journal.
Topping the list, once again, is Gilbert McLaughlin, of Warwick, who retired in October 1991 with an accidental disability pension. He served as fire chief for 15 months before retiring, citing health problems stemming from a job-related injury to his neck and shoulders.
He retired with a $59,001-a-year pension.
With compounded annual COLAs, his annual pension payment from the city grew to $196,813 – almost three times what he made on the job.
McLaughlin has long been the proverbial poster child for the over-the-top benefits city politicians awarded unionized city employees in the past.
The city pension fund is currently 23.49% funded. In pension funding circles, that is considered red-alert, alarm-screaming dangerous.
“A $500 million deposit into the employee retirement system would increase the percentage to 55%,” according to Agonia, the city spokeswoman.
What is happening now:
The city is seeking voter and General Assembly approval to borrow $515 million to pay its pension debts.
Some past critics of the city’s efforts over the years to sell a “pension obligation bond” have come around. They say the city has no choice.
They include Michael DiBiase, executive director of the Rhode Island Public Expenditure Council, a business-financed watchdog group.
DiBiase had previously raised concerns, especially about “the investment risk.”
The risk hasn’t evaporated, but “I have decided to support the most recent proposal as the best option available to respond to unsustainable increases in the City’s required pension contributions, and to the City’s very challenging fiscal situation,” he told The Journal.
Among his reasons: “[Pension obligation bonds] are less risky in the current low interest rate environment.”
“Recent Supreme Court decisions make it very difficult, if not impossible, to alter retiree benefits, which account for nearly all of the unfunded pension liability. … Simply put, the City cannot make changes to retiree benefits and, due to court decisions, current retirees have no incentive to agree to any changes.”
There is also this:
In their most recent contracts, “police and firefighter unions agreed to substantial increases in their pension contribution levels — a positive step in trying to tackle the issue through reforms involving active employees,” DiBiase said.
The firefighters’ lobbyist, Silva, went further: “We’ve done every other possible option that we could have taken to fix this pension system.”
For future generations of retirees, “we eliminated compounded COLAs. … We switched to Medicare at 65. … We’ve set caps on pension payments so no retired firefighter will make more than an active.”
“We’ve … looked under every rock and stone,” he told lawmakers. “This is the final option.”
How much are the city’s current and future pension obligations costing Providence now?
The “actuarial determined contribution” for this year is $93,585,059, and for next year, a projected $100,323,373. The 7.1 percent surge reflects the resumption of COLAs.
How much will the city’s net contribution drop if lawmakers and voters allow the $515 million in borrowing?
Agonia, the city spokeswoman, answers this way: “The [pension obligation bond] would lower the projected growth of pension expenses to 2%, matching the projected revenue growth and therefore fixing the long-term structural deficit.”
Why did the city suspend COLAs?
The Rhode Island Supreme Court summed up the dilemma: “In 1989, the Providence Retirement Board made changes to its employees’ pension benefits, including … an increase in the compounding COLA to 5 and 6 percent per year.”
“In 2011, when Angel Taveras took office as Mayor of the City, the realities of the City’s pension obligations to its retirees and the condition of its pension fund were soon uncovered and led the City’s administration to the conclusion that the system as structured for the then-retirees was unsustainable.”
Among the problems identified by a study commission: “27 percent of the City’s retirees were receiving 5 or 6 percent compounding COLAs … the City’s pension system was [at that time] 34 percent funded.”
The city faced a projected $109.9-million structural budgetary deficit.
In response, the city suspended COLAs for 10 years as part of a package of temporary and permanent reforms.
What COLAs will city retirees get after July 1, 2023?
“Those city employees who signed onto a 2012 legal settlement of a legal challenge to the city’s attempts to cut its pension costs will receive a 3% compounded annual COLA.”
Retirees who opted out of the settlement who retired under a consent decree, court decision or settlement will receive whatever COLA amount they were receiving prior to the COLA suspension. For some of them, that’s 5% or 6% compounded.
How does this compare to the COLAs given state employees, teachers and municipal employees enrolled in the state pension system?
Annual COLAs were suspended by the massive pension overhaul that Raimondo shepherded to passage in 2011, to save the state pension system from imploding. COLAs have been awarded every four years in the decade since.
In 2017, they received a 0.74% COLA. In 2021, they received a 1.06% COLA that was applied to the first $33,130.37 of their pension benefit if they retired before July 1, 2015, and to the first $27,608.18 if they retired more recently, according to the state treasurer’s office.
Put another way, the maximum COLA payment for most retirees in the state pension system last year was $351.18, with the next COLA still three years away for most.
The exception: retired municipal employees in communities with pension funds that are already 80% or more funded.
These retirees are slated to get 3.5% increases this year on their first $27,900.83 in benefits – or $976.53 – if they are newer retirees, and $33,481.55 ($1,171.85) if they are pre-2015 retirees.
How much do current-day city employees contribute to their pensions?
The amounts vary for each of the three main groups of city employees, according to Agonia, who provided this breakdown:
City police officers currently contribute 12% of their pay, which is going up to 13.5% on July 1. City firefighters contribute 9%, which is going up to 10% on July 1 and 16% by the end of their current contract.
Other municipal employees contribute 8%, with no proposed change going forward.
By way of comparison, state employees are required to contribute 3.75% to the state’s defined benefit plan, and 5% to the defined contribution plan, according to the state treasurer’s office.
Teachers contribute 3.75% to the defined benefit plan, and 5% to the defined contribution plan if they are in a community that pays into Social Security on their behalf, and 7% if they are not.
Municipal retirees in communities that pay a COLA are required to contribute 2% to the defined benefit plan. They also pay 5% to the defined contribution plan and more – 7 % – if they worked in a town that did not pay into Social Security for them.
Police officers and firefighters contribute 9% to the defined benefit plan if they are in towns that do not pay a COLA, and 10% in towns that do. (They pay an extra 3% into a defined contribution plan, only if their towns did not contribute to Social Security.)
Of note: these contribution rates apply to employees with less than 20 years of service as of July 1, 2012.
How much is each year of work for the city worth toward an ordinary pension?
For city employees hired before July 1, 1996, who are nearing retirement, each of their first 20 years on the job is worth 2.5% – and every year thereafter, 2% of their highest four years of compensation, excluding overtime.
Fire retirees are capped at 75%. Police are capped at 80%, and municipal employees at 100%, according to the city.
For state employees and teachers, the benefits are not as rich.
For state employees, teachers and municipal workers who had logged fewer than 20 years on the job as of July 1, 2012, each year of work is worth 1% of their final average pay, and for those with more than 20 years at that point, 2%.
Public safety employees in the state-run municipal retirement plan accrue benefits at 2% per year.
Would passage of the pension obligation bond change the benefit structure for any of the city’s past or future retirees?
Simple answer: no.
But city workers contribute more than they had before, and COLAs for future retirees are not as generous as they once were, as a result of earlier stabs at reform.
There is also this: the only retirees eligible for COLAs, once they resume, are those with pensions paying less than 150% of the state median income or “less than the salary” of a current-day police or fire employee at the same rank the retiree once held.
“It would appear Gilbert McLaughlin would not be eligible for a COLA,” Agonia said.
