With Budget Commission, Woonsocket Deficit Problem Nearly Doubles

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Since Central Falls blazed the Rhode Island trail to municipal bankruptcy, other cities and towns in the state have been illustrating the various pitfalls that can lead toward the same fate.

In East Providence, which is currently operating under a budget commission, a cumulative school-department deficit of $7.3 million tipped the scales toward state oversight.  Meanwhile, West Warwick has slipped into the picture after acknowledging that the accounting and funding practices for its locally administered pension plan dramatically understated its health.

Yesterday, Woonsocket joined Central Falls and East Providence in official state oversight when Dept. of Revenue Director Rosemary Booth Gallogly appointed a budget commission for the city.  In its case, the blame has generally fallen on the school department’s surprise $10 million deficit — despite $11.5 million in borrowing via a deficit bond last year.  Indeed, the municipal side of the budget is generally thought to be healthy, with a $435,000 surplus for fiscal year 2011, which ended last June.

But in comments after Governor Lincoln Chafee’s related press conference, yesterday, Gallogly presented Woonsocket’s budgetary gaps as much greater, to the tune of around $7 million a year.

At issue is the city’s locally administered police and fire pension plan, which was closed to new members in 1980 for police and 1985 for firefighters.  In 2003, the General Assembly passed special legislation allowing Woonsocket to sell $90 million in bonds to bring the plan to fully funded status.  (Before that, it had operated on a pay-as-you-go basis.)  Under the terms of the law, any shortfalls in the plan’s funding would have to be amortized over a five-year period — that is, returned to full funding over that period.

However, in the years since the national financial crisis, Woonsocket’s pension fund, already falling short of required investment returns, lost around 35% of its value.  A July 2011 actuarial report puts the fund’s assets at $61,980,287, which is only 57.69% of the $107,686,695 required for full funding.

Asked whether the budget commission would make five-year amortization of the plan a priority, Gallogly told The Current, “they definitely will.”  She explained that the city has expressed a desire to increase its pension payments after it is done paying off its deficit-bond debt, “but that’s a five-year bond, so that’s going to be a while before that’s paid off.”

According to the city’s actuarial consultant, USI Consulting Group, the employer contribution, as of last July, should have been $10,484,317 under the five-year amortization schedule.  Instead, the city has illegally been following a 30-year amortization schedule, reducing its payments to $3,610,195.

Gallogly also discussed legislation currently in the works that would make the fiscal oversight process a path for local pensions to the state-run Municipal Employee Retirement System (MERS).  Assuming the legislation passes, Gallogly says the budget commission “can start the process.”

However, she noted that in Central Falls the receiver and bankruptcy court forced a dramatic restructuring of retirees’ deals.  At the Senate Finance Committee hearing on the legislation, Ocean State Tea Party in Action (OSTPA) lobbyist Diane McLaughlin expressed concern that one purpose of the plan appeared to be to undo some of the restructuring, perhaps shifting the burden toward state taxpayers.

Whether or not Woonsocket follows Central Falls and Providence in seeking concessions from current retirees, and whether or not the MERS legislation passes, the state’s latest subject for municipal fiscal oversight may represent a prime example of the challenges that mismanaged Rhode Island cities and towns face.



  • Justin,

    Two questions:

    1. If Woonsocket went the same route as Providence and froze cost-of-living adjustments by ordinance, do you know how much of the $7M annual gap that would close?

    2. I understand the advantage of joining MERS from the perspective of an outside observer; the assumption is that the state will be more consistent than municipal authorities in making the actuarially calculated pension contributions. But what is supposed to be the incentive for the locality, other than something like an opportunity to shift responsibility/blame for probably unpopular decisions to someone else?

  • justinkatz

    Andrew,
    1. I haven't researched Woonsocket's pensions to the level of detail that would allow me to say. I do know that, for most, it's a 3% compounding COLA. Keep in mind that the $7 million is the additional annual payment needed per year to (in conjunction with the payment already planned to be made) close the $46 million gap in the present value of future benefits.

    These calculations are very complex, so the actuaries would have to run the numbers. But since all but 6 eligible members are already retired, I think the following rough estimate works:

    All told, over the theoretical 30 years of amortization, the plan has to come up with about $877 million in cash. If we discount that back dividing by 1.03 over 30 years and discount it again using the 7.5% investment return assumption, we end up with about $46 million. I *think* that works as a back-of-the-envelope estimate of the present value of future benefits if we assume (1) everybody's retired, (2) everybody's on the 3% COLA plan, and (3) nobody ever gets a COLA again. By this very, very rough math, a 10 year suspension would bring the present value to $83 million, and 20 year suspension would bring it to $61 million.

    2. Well, for the municipal politicians, the first benefit is to put pensions in a "we gotta do it" category, almost like a state mandate. I think the fear, among good-government types, is that somehow the deal will transfer financial responsibility to the state taxpayer. Sure, maybe the state *can* withhold aid to towns that don't fund their ARCs, but who knows but that enough of a sob story will get them to waive that requirement once they're actually in the plan.

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