In his budget proposal last night, Providence Mayor Jorge Elorza struck a can-do attitude on improving the city’s schools and building affordable housing. One thing that didn’t get much attention: the city’s $1 billion unfunded pension liability. There are a handful of painful options the city could consider to fix the problem, but none of them are popular.
For most of this decade, Sam Zurier has worried about this problem.
“This was the issue that I lost most sleep about at night - this pension.”
Zurier served on the City Council from 2011 to 2018 and contributed to a 2018 report on the pension system. He’s well aware of the fact that Providence owes its current and future retirees about $1.3 billion. And the city only has a quarter of that money set enough aside to cover the benefit payments.
“It’s not a new issue either,” Zurier adds. “You can go back, actually, to when Mayor Cicilline was in office, he said this was the issue that could bankrupt the city.”
The mess dates back to 1989, when union representatives won a majority of seats on the city’s retirement board. To improve benefits for city workers, the Board tripled the minimum pension payout and lowered the years of service needed to earn a pension. It also approved an increase in payouts of up to six percent a year.
When Mayor Buddy Cianci returned to City Hall in 1991, he signed off on these changes. But under his leadership the city failed to pay $88 million into the pension system.
In the decades since, the city’s unfunded pension liability has ballooned, crossing the $1 billion mark in 2017.
“Sometimes I think of the Sword of Damocles hanging over the city of Providence,” Zurier says of the pension liability. “Another one is the iceberg facing the Titanic: if we don’t do something about it, on an urgent basis, it’ll become more and more difficult to solve it at all.”
In 2010, the city re-financed the unfunded pension liability, with the goal of fully funding the pension system in thirty years. To meet that goal, the city's Annual Required Contribution will continue to grow every year until 2040.
And these growing payments are where the pension liability starts to hit the city’s budget.
“Basically the city’s pension obligation is going up by 3.5 percent every year. And the city’s budget otherwise is going up by around 2 percent a year. And that would serve to crowd out the city’s ability to fund essential services,” Zurier explains.
Next year, the city will put $86.7 million towards the pension fund. And that means serious trade-offs that could affect things like staffing the police force, maintaining roads, and fixing up the city’s aging schools buildings.
City Councilor Nirva LaFortune says, “It's important for us to look at this as a domino effect. The Providence Public Schools, when they close their budget at the end of the year, they're going to have a significant deficit. We also need to think about housing, affordability.”
This problem isn’t limited to Providence. According to a report released by Rhode Island’s General Treasurer this week, almost two thirds of locally-run pension systems in Rhode Island are critically underfunded. Everyone’s looking for solutions.
In Providence, city leaders has been having the same conversation for two decades now because none of the options are without a high political price, a price no one wants to pay.
Some say the city should just declare bankruptcy and get it over with. They point to Central Falls - the come-back city just north of Providence. But Sam Zurier says that’s not an option.
“Things would have to get a lot worse for it to be eligible for bankruptcy. And in that case the cure would be worse than the disease,” Zurier says.
That’s because it basically puts the city’s financial decision-making and its future in the hands of the courts.
Another tactic: change the pension system. The city pays out over $100 million in retirement benefits each year, and critics say those costs are too high.
Here’s what they don’t like about how the system works: long term employees are promised a percentage of salary after retirement. It can be as much as 80%. With cost of living adjustments, that amount can continue to grow. About 150 retirees currently get as much as $6,000 a month. City Councilor John Igliozzi chairs the city finance committee. He compares the pension system to a leaky boat. He wants the city to plug the holes by changing retirees payout options.
“We need to at least show to the state and to the people that we are going to do everything we can to reform the system,” Igliozzi says. “Things like new hires coming on board, maybe what we do there is they have to pay more into the pension system. Get less and take longer to get.”
But retirees and the city’s employee unions are fiercely opposed to changes that will cut their promised retirement benefits.
Tom Johnston is president of the Providence Police and Firefighters Retirement Association. He says, the criticism is over-blown.
“You know people feel as though the retirees are making these gigantic pensions. They take a chief’s pension, and say, ‘Oh retirees are making $90,000 a year or something,’” Johnston says. “You know, a guy worked his way up, he became a chief, that’s his retirement. But quite honestly the majority of guys, it’s far less than that.”
The average pension for a city retiree is just over $29,000 a year, according to the latest actuarial report. And Johnston says, retirees have already made sacrifices, like agreeing to a ten-year freeze on cost of living adjustments to help the city out of financial trouble in 2013. Now, they expect the city to pay up.
“A firefighter, police officer comes on the job, they’re asked to perform a risky job and they’re promised certain benefits. They expect the city to abide by it,” Johnston says.
Going after pension reform might not be the pot of gold some are hoping for. Last year, a city council working group found that reducing pension payments would save the city a few million dollars a year. That could ease some pressure on the city’s budget, but it won’t solve the whole problem.
Still it’s one idea to tackle the pension debt. Another is to find more money.
The city could raise taxes, for example, or start taxing nonprofits. More than 40 percent of the city’s land is off the tax rolls because it’s held by universities, hospitals, religious organizations, and other nonprofits. Providence does get some money from nonprofits in the form of payments in lieu of taxes, and past Mayors Cicilline and Taveras pushed to increase those payments. But going after that tax-exempt property is Tom Johnston’s preferred strategy.
“More and more properties, the nonprofits, are allowed to go off the tax rolls,” Johnston says. “It needs to be looked into, revised, and quite frankly people need to be paying their fair share.”
Some of that land is held by the city itself.
“There are other assets out there. I suppose we could sell Roger Williams Park Zoo. Maybe that would realize some money,” former City Councilor Sam Zurier says.
But building condos on the city’s biggest green space is a non-starter for many.
So is the idea of selling off the water. In fact, Providence Mayor Jorge Elorza backed off legislation that would allow the city to privatize the water supply last month -- after the proposal stalled at the statehouse and faced criticism from activists like Cristina Cabrera.
“Water is not an asset to monetize,” Cabrera argues. “This is a natural resource that we depend on for sustainability, that we depend on for life. We use water for absolutely everything that we do.”
But the water isn’t out of play. Far from it. The system has been valued at more than $400 million dollars and many see it as an asset that the city could still use to help pay its growing pension obligations. We’ll take a closer look at that possibility tomorrow.