Woonsocket’s Unique Pension Woes Prove Deeper Problems

With the Rhode Island House effectively killing Woonsocket’s plans to raise property taxes by 13% with an immediate supplemental tax bill, the city council has voted to to request a state budget commission.  That would put Woonsocket at stage two of Rhode Island’s fiscal oversight process, with an appointed body (three Dept. of Revenue appointees, the mayor, and the city council president) able to act on behalf of the state and broadly wield municipal authority.  If that proves insufficient, the final stage of the process is a municipal receiver, who essentially holds complete local authority, including the power to bring the city into bankruptcy.

At a special meeting Sunday night, Councilman Albert Brien joined those who believe that the city should move directly to the receivership stage and bankruptcy.  As one commenter put it on Anchor Rising, that path would amount to a “reset,” and its proponents believe the city could move forward from there.

Their reasoning begins with the general understanding that Woonsocket’s predicament stems entirely from extreme financial mismanagement on the school side of the budget, leaving the city $10 million in deficit.  Meanwhile, the municipal side is said to be in respectable shape.  Indeed, according to GoLocalProv, the city’s local police and fire pension plan isn’t even among the two dozen across the state that are considered to be “critical.”

The reason that view of the city’s pension fund is arguably erroneous is closely related to the reason that receivership and bankruptcy may not be quite the “reset” opportunity that some Rhode Islanders believe it to be.

Prior to 2003, Woonsocket paid retirees in its local pension plan on a pay-as-you-go basis, meaning that there was no fund providing investment returns.  (New employees stopped entering the plan in 1980, working instead with the state’s Municipal Employee Retirement System [MERS].)  That year, the General Assembly passed targeted legislation allowing the city to sell $90 million in pension obligation bonds to fully fund its pension debt.

That does not mean that the city would never need more than $90 million to pay its benefits.  Rather, it needed $90 million invested at that time so that reasonable regular payments and investment profits would cover ongoing expenses, which would amount to much more.

Until last year, the city assumed that its investments would bring in 8.25% growth of the fund each year.  In actuality, by 2007, just before the national financial crisis, the fund stood at $94,137,191, which amounted to less than a 5% increase over five years.

Since then, the fund has lost ground, and as of July 1, 2011, actuaries placed its market value of assets at $61,980,287.  That’s a 34% decrease over four years.  The city lowered its investment return assumption to 7.5% in 2010, but anything above 0% is pointed in the opposite direction of five-year experience.

So, yes, Woonsocket’s pension is 57.7% funded, but it was 100% funded less than a decade ago.

More to the point of the city’s current budget, the law allowing Woonsocket to sell pension obligation bonds in the first place required it to increase payments to make up shortfalls in investment returns within five years.  Because the municipal government has not done so, it has effectively been borrowing from its pension fund to cover deficits in regular spending.

The example is instructive:  Selling pension obligation bonds to bring Woonsocket’s local police and fire pension plan to “fully funded” status was, in a sense, a “reset” of its plan.  But resets mean very little if the way of doing business does not change sufficiently to chart a new course.

Receivership and bankruptcy can reorder a city’s finances and policies more dramatically than bonds alone, but unless the people ultimately responsible for governance — the local electorate — understand how government has to operate, the incentives and motivations that have led them so far astray will only reassert themselves.

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