2011-07-14 / Front Page

Higher taxes solution to pensions crisis

By Phil Zahodiakin

The current fiscal year will be the last one before Jamestown property owners start paying higher taxes to help Rhode Island bridge enormous gaps in the pension funds managed by the state on behalf of the town’s teachers and non-public-safety municipal employees. The question is: How much will property taxes go up?

The state sets the level of contributions paid by towns and employees enrolled in the statemanaged pension system. The shortfalls in the assets managed by the state have been growing at an alarming rate for the past decade.

Town Administrator Bruce Keiser said it’s impossible to predict the tax hike required to address the shortfalls because legislative reforms could reduce the increase in municipal contributions.

The reforms will potentially affect the benefits that Jamestown is contractually required to pay its retirees – along with the contributions that employees themselves are required to pay into their pension funds.

“Barring any reforms in the benefits we are obligated to deliver under the town’s collective bargaining agreement with nonpublic safety retirees, people who own a home assessed at $400,000 would have to pay an additional $50 per year in property taxes,” Keiser said.

The $50 doesn’t include the increase that property owners will have to shoulder to reduce the pension deficit on the teachers’ side. Although she declined to translate the potential increase into a dollar amount, School Committee Chairwoman Cathy Kaiser said that the town’s contributions to the state-managed teachers fund – which is separate from the municipal-employees fund – could jump 66 percent.

The only Jamestown employees whose pensions aren’t in any jeopardy are police officers. The reason that the town won’t have to shore up retirement funding for those retirees helps explain why the pension funds for the town’s other retirees have eroded disastrously.

In 1999, when speculation in “high tech” stocks was fueling a stock market bubble, the pension contributions that the state invested for teachers and mu- nicipal employees were actually overfunded by as much as 170 percent of plan assets because pension-fund investments were returning over 10 percent per year.

In response to all that abundance, Town Administrator Keiser said, “The state retirement board made an unwise decision when they looked at the healthy surplus and said, ‘Contributions from the towns will be zero for the next three years.’

“Before that decision,” Keiser continued, “our pension fund contribution was 6 or 7 percent, but then the tech bubble burst, and the economy became sluggish in the aftermath of 9/11, which affected the stock market and the state’s return on investments. So, the state said, ‘Wait a minute, we can’t continue to charge you nothing,’ so they resumed charging us contributions, whichstartedata3percentlevel.”

By 2008, the contribution rate had been raised to 8.25 percent. But the collapse of Wall Street banks that year sent the stock market into a freefall, which turned Rhode Island’s pensionfund surpluses into deficits. “Had the state continued to collect their 6 or 7 percent for those three years when they didn’t ask for anything,” Keiser said, “the municipal employees’ pension would probably be 90 percent funded now.”

During those three non-contributing years, the town continued to pay into the police-pension fund because it’s a privately managed plan that’s unaffected by state prescriptions for municipal contributions. As a result, “The pension plan for retired police is fully funded,” said Finance Director Tina Collins.

The pension outlook for municipal employees was far worse than anyone in state government revealed during most of the previous decade. As state Treasurer Gina Raimondo announced in April, returns on state-managed pension funds averaged just 2 percent from 2000 to 2009. At the same time, an actuarial study performed for the state determined that retirees were living longer than previously projected. Consequently, the state is facing a $7 billion price tag to bridge the gap in its unfunded pension obligations.

During the last two years, the stock market has been much stronger, with the Dow Jones rebounding strongly from its 2008 level. During that time, annual returns on pension-fund investments climbed into a range of 9 to 12 percent.

Nevertheless, the state retirement board has downgraded its projections for annual returns to 7.5 percent. Before the adjustment, “Our plan assets filled 80 percent of our need to meet future pension obligations,” Keiser said. “With the recent adjustments to the rate of return and the retirees’ [projected] mortality rates, our pension-fund assets fell to 67 percent of the level where they need to be. That has a huge impact on the amount of money expected to come into our plan through market appreciation and the amount of money necessary to pay out benefits over the course of our retirees’ lives after retirement.”

During this fiscal year, the town will be paying 11.18 percent of its non-public-safety employees’ earnings into the pension fund. Next year – unless there are legislative reforms – the percentage will increase to more than 18 percent. “That would be an increase of $242,000 on the town side, which would increase the property tax rate by 13 cents,” Keiser said.

Currently, the minimum retirement age set by the state for municipal employees is 58, with 10 years of service necessary to qualify for pension benefits; or any age as long as the retiree has 30 years of service. (The agreement with Jamestown’s police officers has a different retirement age and service periods because the state does not set those terms for privately managed pension plans.)

Beyond the thorny politics required to change the language in state-managed pension plans, Rhode Island is also facing a lawsuit intended to block any reforms.

“There is already a suit before the court filed buy a number of unions, including the American Federation of State, Municipal and County Employees, challenging right of the legislature to change benefits in a collective bargaining agreement,” Keiser said. “But the legislature is proceeding as if it has a free hand to alter the contracts between employers and labor unions.”

One of those unions is the teachers’ union, whose agreement with Jamestown required the town to contribute 11.25 percent of the teachers’ salaries toward their pension. This fiscal year, the contribution increases to 13.23 percent. Next year, the contribution – barring reforms – could jump to a level even higher than the worst-case projection for the town side.

“If there are no reforms, and that’s a big ‘if,’ it’s anticipated that our contribution rate could go as high as 20 percent,” School Committee Chairwoman Kaiser said. “But that assumes no reforms, and we expect to see some reforms coming out of the legislative meetings in the fall. Gina Raimondo is pretty adamant about the fact that everybody owns this problem and that everybody is going to have to be part of the solution. It’s not just going to be the employers, it’s not just going to be the teachers – and it may also be retired teachers.

“But the legislature,” Kaiser continued, “is clear in its intention to do something about this problem. It’s been known – not the extent of the problem – but the problem has been known for 10 years.”

At this point, Collins said, “We are just keeping an eye on what’s going on. I have a new actuarial [study] as of June 30, so I’ll be reviewing that. But I don’t foresee us having to adjust our contributions [in response to that study] because we’re already working with a smaller [non-safety municipal] staff than in previous years. But we always revisit the [actuarial studies] to make sure our assumptions are accurate.”

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