Providence Mayor Angel Taveras shocked the city in February with his revelation that the state capital would be forced to file for Chapter 9 bankruptcy if its nonprofit institutions and municipal unions refused to agree to cost-saving measures. After negotiations, a number of health care providers and colleges – including Brown – increased their contribution commitments to the city in the spring. And May 30, the city announced a tentative agreement with retirees and police and firefighters unions, and Taveras declared Providence “back from the brink.”
The deal has not yet been formally approved by the firefighter and police unions, but the announcement seems to mark the end of a heated period that at times pitted the city against the University and other nonprofits, targeted nearly everyone in Providence for painful sacrifices and required a restructuring of Providence’s pension system.
When Taveras entered office in January 2011, he faced an annual structural deficit of $110 million for an operating budget of about $630 million. The crisis encouraged a round of significant budget cuts and tax increases. The city slashed spending in nearly every department, closing several schools, cutting 200 employees from the city payroll and raising taxes by 11 percent – an increase significant enough to require state approval, according to David Ortiz, the mayor’s press secretary. The mayor also voluntarily accepted a salary cut of 10 percent.
But the city was still short more than $20 million in April of this year, spurring the mayor to begin negotiating with the city’s pensioners and nonprofit institutions, asking that all parties make concessions to keep the city from going bankrupt at the end of the fiscal year in June.
In response, many of the city’s tax-exempt institutions – which include universities, health care providers and places of worship – increased their payments in lieu of taxes. The city’s tax-exempt institutions own around 40 percent of Providence’s taxable land, a financial burden in a city where property taxes provide a substantial chunk of the annual operating budget.
The University agreed to pay an additional $31.5 million over 11 years, a decision to double annual voluntary payments that represented the culmination of contentious negotiations between the city and Brown and protests by some Providence residents who felt the University should increase contributions. Through most of former President Ruth Simmons’ final semester of her tenure, the University was involved in negotiations with the city that at one point became so heated that Gov. Lincoln Chafee ’75 P’14 P’16 stepped in to moderate the proceedings.
When the deal between Providence and Brown was announced May 1, Taveras said the agreement exceeded his expectations, describing the day he heard about the University’s offer as one of the best during his term as mayor.
In all, contributions from the University, the Rhode Island School of Design, Johnson & Wales University and several health care providers netted the city an additional $5.95 million for the last fiscal year – just short of the mayor’s goal of $7.1 million. Providence College was the only major nonprofit institution that refused to renegotiate its PILOT payments, Ortiz said.
The increased payments from the city’s tax-exempt institutions provided the city with additional revenue for the previous fiscal year. But in a February press release, Taveras said that until the city could strike a deal with unions and retirees to reform the pension and health care system, Providence’s finances would never be sustainable, and bankruptcy would remain a possibility.
Pension overhaul and ongoing troubles
When Taveras announced the city’s financial woes, its pension system was critically underfunded. And previous administrations’ failures to adequately fund the city’s pension system made it costlier for Taveras’ city government to shore up the system. The city’s annual required contribution to the pension fund last year totaled $59 million, around 20 percent of its annual budget.
Under the plan the mayor inherited, the city’s annual required payment would rise to $207 million annually by 2039, Ortiz added. With unanimous support from the city council, he passed a pension reform ordinance April 30 that would have saved the city around $19 million annually. The resolution passed but faced a legal challenge from the city’s unions and retirees whose benefits would be compromised. The mayor continued negotiations and announced a tentative agreement with the workers May 30. The settlement – which the retirees have agreed to and is pending approval by firefighters and police unions – will save the city $18.5 million for fiscal year 2012-13 by cutting benefits.
Taveras’ administration focused its pension reform efforts on cost-of-living adjustments, which compound the value of the pension at rates between 3 and 6 percent annually. Though the majority of pensions increase at rates below 5 percent, a quarter of all yearly pensions pay out in the six figures, Ortiz said.
Paul Doughty, president of the Providence firefighters’ Local 799 union, told The Herald unions would be willing to work with the administration to reach a deal that balanced the needs of the city with the interests of union members.
Doughty said his union accepted the deal after it became clear to him that it could stand to lose much more in bankruptcy than if it made the concessions Taveras sought. He had originally filed a lawsuit to stop the city council’s pension reform, but he said a union victory in the lawsuit would have forced the city into bankruptcy – a bad result for both his union and the city.
Under the new tentative agreement, cost-of-living adjustments will be suspended for 10 years, though families of city employees who lose their lives on the job will still be entitled to COLAs. The COLAs will be reinstated in 2023 for pensions under 150 percent of the state median income until they reach that amount – a statute intended to rein in some of the largest pensions.
These COLA adjustments lower the annual cost of the pension program and help to reduce the city’s unfunded pension liability. The city has promised $1.32 billion to its employees in pensions over the next several decades, but has only accounted for $423 million, Ortiz said. While the pension system does not need to be entirely funded since the city does not incur the full cost of the pensions at once, experts consider a fund in a dangerous position if it is less than 70 percent funded. Providence’s was 32 percent funded at the beginning of this year, Ortiz said.
The pension deal reduces the total unfunded liability – previously $900 million – by $170 million, Ortiz said. The reduced total liability should lower the city’s annual payments to the fund.
The unfunded liability has increased rapidly in recent years, which Taveras has attributed to neglect by previous administrations, including that of current Rep. David Cicilline ’83, D-R.I. The fund also took a hit when the stock market crashed in 200
8. Providence’s pension fund suffered more than Rhode Island’s when risky investments that paid off during good economic times failed, the Providence Journal reported. As a result, the city has now lowered its expectations for the fund’s annual growth.
Providence also faces a $1.5 billion unfunded liability for its health care system for city pensioners. The settlement addressed this problem by moving retirees over the age of 65 – who receive health insurance from the city – into Medicare. This provision is expected to save the city $40 million over the next 10 years, Ortiz said. The Medicare deal ended a lawsuit filed by retired police and firefighters that had initially blocked the mayor’s effort to transfer the retirees to the federal government’s health insurance program. The city will subsidize additional coverage in coordination with Medicare.
Despite sacrifices from almost every sector of Providence, the city still did not manage to close the deficit. Though the numbers are not yet final, Ortiz predicts the city will report an $11.5 million deficit for fiscal year 2011-12. The deficit does not force the city into bankruptcy, but it requires the city to pay into a rainy-day fund for the next few years until it has recouped the money.