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.
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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.