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Police/fire pension fix not going to be easy

March 20, 2013

PAWTUCKET — If it could be talked about in human terms, everyone involved acknowledges that the city's police and fire pension fund is sick...critical, in fact. And everyone is in agreement that life-saving measures must be taken. Yet, the way to go about restoring the plan to good health is being viewed differently by the various parties involved, although at some point, a consensus will have to be reached.
At tonight's City Council meeting, the council is expected to be given the first draft of the plan that the city administration is proposing to rescue the police and fire pension fund. As of the last actuary evaluation, the plan is only 34 percent funded, which placed it in “critical status” in the eyes of the state. Once the City Council approves a “funding improvement plan,” it will be submitted to the state Locally Administered Pension Plan Study Commission for final approval.
At a meeting with retirees held on March 13, Mayor Donald Grebien outlined the “severely troubled” pension plan, which, as of July 2011 had assets of $73.4 million but an unfunded liability of almost $145 million and a total accrued liability of $218 million. The plan's participants include 350 retirees and 280 active employees.
Grebien said that for fiscal year 2012, the annual required contribution (ARC) payment would be $11.8 million, which represents 10.42 percent of the city's budget and 63.3 percent of fire and police payroll for FY13. Yet, the mayor and other city officials noted that the city can't “tax its way out of the problem.”
As such, the city administration is asking all plan participants (retirees and active) to agree to a freeze of the annual cost of living (COLA) raises for three years. In return, the city is pledging to fund the plan at 3 percent above the annual required contribution (ARC), and to make other reductions in city spending, until the pension plan is made 100 percent whole again.
According to the proposed plan (based on the three-year COLA deferment), the city would start by making a payment of $12 million in FY13. Based on an actuary report , the city would then make a series of incremental escalating payments that are projected to increase the ARC by an additional $1.8 million five years later (in 2018), and then make an additional $4 million increase to the ARC payment ten years out (in 2023). This would bring the pension fund to 55.5 percent funded, close to the 60 percent that the state requires.
Continuing in this fashion, with the projected ARC at $21.3 million in 2033, there would be an additional increase in the ARC payment of $8.3 million 20 years out. According to these actuary calculations, the plan would reach 100 percent funding 29 years later, in 2042.
Grebien and other members of his administrative team have acknowledged what is a major criticism from past and present public safety employees— that the pension fund was not properly funded by past city administrations. However, the mayor and Pires both say that, despite how the problem developed, a solution is necessary. Not only to keep the city solvent and maintain its current fragile credit rating, but as legally required by state law which now forces municipalities to make the ARC contributions.
Jeremiah O'Connor, head of the recently formed Pawtucket Public Safety Retirees Association, spoke at the March 13 meeting in response to the proposed pension fix. He said that while the city's focus on restoring the pension fund is a step in the right direction, he is calling for a much more detailed analysis of where the money went that was supposed to be used for the fund. He is also demanding to know what steps will be taken by the city to ensure that fiduciary responsibility is enforced by administrators going forward.
O'Connor, who retired as a Pawtucket Police sergeant in 1981 and helped negotiate the original pension plan, said the agreement forged back in 1968 called for the city to contribute three times the amount an employee would contribute. Following an escrow period in 1968-1973, he said these terms and conditions were defined in the collective bargaining agreement. While it appeared that the city was making good on its contributions when he retired, back in 1981, at some later point, the city failed to keep the agreed-to rate of three times that of the employees' contribution.
O'Connor said it was especially galling for retirees to learn that, not only did past administrations fail to contribute the amount that had been agreed to, for several years in the 1990s, the city didn't even contribute the 6.5 percent that was deducted directly from police and fire employees' paychecks. He maintained that this 6.5 percent was a negotiated wage condition that was set aside for the purpose of funding the pension plan.
According to information obtained by the Fraternal Order of Police, O'Connor said records show that in 1991 and 1992, the police and fire contribution is listed as “unknown” and that in 1994, 1995 and 1996, the city contributed nothing to the fund (leaving just the employee contributions). Plus, while money was placed in the fund from the city side in 1996-2001, the report obtained by the union listed as “unknown” the police and fire employee contributions.
O'Connor noted that these years in the 1990s when the plan was being shortchanged were some of the most lucrative in relation to returns on investments. Had the money been put in as it should have, the plan would be in much better fiscal shape today. Even more so, the former detective said he wants to know where the money went that was taken directly from the employees' wages during 1994-1996. He points out that a private pension fund is covered by federal ERISA standards and failure to make required contributions are considered to be criminal.
O'Connor said he is not placing any blame on the current administration, per se, but also feels it is unfair to ask that the retirees make negative changes to their benefits when the city has acted so irresponsibly. He noted that while past administrations failed to keep up with the police and fire pension fund, the pension funds of other municipal employees, including mayors and administrators past and present and the city's school teachers, have had contributions made in a timely manner.
O'Connor said that on behalf of the retirees, he has asked the Grebien Administration to provide records of the funding for the pension dating back to 1973, when the escrow period ended. He also asked if the city would be willing to conduct a certified audit to determine what the funding level and return on investments would be today had the total contributions been made in a timely manner. He said that at this point, he simply wants more information so he can report back to the retirees group at an upcoming meeting.
O'Connor said that, unlike with a private pension fund, the retirees received no statement of any kind over the years about their pension fund and how it was performing. He said that until he and the other retirees received a letter last April informing them of the pension's “critical status” he had no idea that there was a problem. The letter spurred him to start attending the meetings of an ad hoc pension study committee, chaired by Ernest Almonte, that were held last year. However, he was surprised at how few of his fellow retirees came to the meetings or seemed to be informed on the issue. That has changed, he said, and now through some outreach there are about 160 or so concerned retirees who meet regularly to discuss the matter.
Director of Administration Tony Pires told the Times that the city intends to be forthcoming with the information O'Connor has requested as much as possible, but acknowledged that even for a period in the 1990s, there are years where it is unknown if actuarial studies were done on the pension contributions. He said it appears that if the ARCs had been made each year as they should have been, the police and fire pension fund would likely be at 70 to 80 percent funding capacity.
Pires said, however, that at the end of the day, it doesn't matter how the current situation with the underfunded pension was arrived at, but what is done to address it. He said the actuary run that is being presented to the City Council is the administration's preferred option and it will be up to that body to move it forward to the state Pension Study Commission.
Pires said, “We've gotten through the process of determining what the liabilities are and how bad, and providing a documented solution as to how we get out of critical status.” However, he said the solution also means getting retirees and active participants, along with their union leaders, to agree to these recommendations.
“Our job isn't to paint a picture of gloom and doom. It's a math problem, and it can be resolved,” noted Pires. Yet, he stressed that the matter can't be fixed on the backs of the city's already-burdened taxpayers. “We're saying, 'We're looking to save your pension. And it's not affordable simply by the ARC payments'.”
Pires noted that the current administration has paid the ARC payment and is looking to move forward. However, he said that if the participants don't want to help the city make concessions, they run the risk of the city not being able to afford the level of ARC payments needed to take the plan out of its critical status. If that occurred, the city would have to get into discussions about even greater cuts, to the actual benefits themselves, or worse, declare bankruptcy.
“Everyone must recognize that this is a major problem. It will require a lot of effort on the part of the administration, the retirees group, and the active union leaders,” said Pires.
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