The scale of the shortfall in Providence’s city pension system likely ranks among the worst in the United States, according to one consultant who advises public pension systems.
The City of Providence Retirement System reported $1.3 billion ($1,256 million) in liabilities but only $428 million in assets as of June 30, leaving it just 34% funded, according to the emergency report delivered to Mayor Angel Taveras this week. Most actuaries recommend a funded ratio of at least 80%.
“That’s about as bad as I’ve heard,” William “Flick” Fornia, founder and president of Pension Trustee Advisors Inc., told me this morning at The Poverty Institute’s annual state budget conference, though Fornia also cautioned that he was unfamiliar with the specifics of Providence’s situation.
Puerto Rico’s pension system is one of the few in worse shape than Providence’s, with a funded ratio of just under 10%, according to Fornia. That’s despite the fact the unhealthiest funds in the Puerto Rican system were closed to new employees a decade ago.
“The poorly funded status of [Providence’s] plan is the result of inadequate funding in prior years … generous benefits and cost of living increases, liberal disability pension provisions and the ability to collect benefits at an early age,” the members of Taveras’ fiscal review panel wrote in their final report.
Providence’s only options are to shovel significantly more money into the pension fund or break its promises to current and future retirees, Fornia said. Taveras, who is a guest on WPRI 12’s “Newsmakers” this weekend, has said he wants to look at restructuring the city pension system.
The capital city’s $828 million unfunded pension liability does not include an additional $1,497 million unfunded liability for retiree health care, for which only $1 million has been set aside thus far.
If the city had contributed the full annual required contribution to its pension and retiree health funds last year (which it didn’t), the total cost would have been $150 million – equal to 24% of the annual city budget and 51% of annual property tax revenue.
Fornia also warned that a narrow focus solely on the challenges facing public pension systems overlooks a larger problem: that many Americans with 401(k) accounts do not have enough saved to support themselves when they retire, as The Wall Street Journal reported last month:
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse. …
Facing shortfalls, many people are postponing retirement, moving to cheaper housing, buying less-expensive food, cutting back on travel, taking bigger risks with their investments and making other sacrifices they never imagined.
(photo: Tim White/WPRI)