Providence pension tab will near $1B if city lowers investment forecast

WPRI/Dan McGowan
WPRI/Dan McGowan

PROVIDENCE, R.I. (WPRI) –The shortfall in Providence’s pension fund could grow to $1 billion in upcoming years if city officials sign off on a proposal to lower the assumed average annual return on its investments to 8%, according to the city’s actuarial firm.

Mayor Jorge Elorza told Eyewitness News he supports lowering the assumed rate of return from 8.25% to 8%, but the change must be approved by the Providence Retirement Board.

“This will most likely be presented to the board at their October meeting,” Elorza said.

Providence’s pension system was funded at just 28% by the end of the 2014-15 fiscal year, with $354 million in assets and an unfunded liability of $894 million, according to an actuarial experience review conducted by The Segal Group Inc.

The firm has recommended that the city lower its assumed investment return to 8% and adjust mortality rates, two changes designed to give more predictability to a fund whose 20-year expected rate of return is actually 6.58%, according to a memo internal auditor Matt Clarkin sent the City Council last month.

But the changes will come at a cost.

Under its current pension funding schedule, the city is expected to make a $73-million contribution to the fund during the current fiscal year. (The entire city budget is $717.9 million.) That payment is projected to grow by around 3.5% a year until 2040, when the annual contribution would be $160.5 million.

Elorza said moving to an 8% assumed return will cost the city an additional $4 million annually and will be phased in over two years beginning July 1, 2017. The changes are also projected to increase the overall unfunded pension liability to $998.2 million by the 2021-22 fiscal year, before gradually falling due to the increased contributions.

The average assumed investment rate of return for pension plans in the United States is 7.62%, according to the National Association of State Retirement Administrators. In 2011, then-General Treasurer Gina Raimondo led the effort to lower the state pension system’s assumed return from 8.25% to 7.5%. Her successor, Seth Magaziner, recently signaled the state may lower the number again next year.

City Treasurer James Lombardi, a member of the retirement board, told Eyewitness News he believes the assumed rate should be lowered to 7.5%. He said he would vote against the proposal to move to 8%.

“The lower the rate, the more realistic the liability is,” Lombardi said. “Then we can address the problem in a more realistic manner.”

The city is still waiting for a Superior Court judge to rule on a lawsuit filed by a group of retirees who refused to support a settlement between the city, its municipal unions and retirees that froze 3% COLAs for 10 years, eliminated 5% and 6% COLAs forever and shifted how pensions are calculated. The deal also shifted retirees over the age of 65 to Medicare.

A bench trial in front of Judge Sarah Taft-Carter ended in April.

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Dan McGowan ( ) covers politics, education and the city of Providence for Follow him on Facebook and Twitter: @danmcgowan