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Hearing examines municipal pensions

Rhode Island House and Senate finance committees met yesterday for the second of three joint hearings on fixing the state's escalating pension problems. Sen. Daniel Daponte, D-East Providence and Pawtucket, and chair of the Senate committee on finance, announced that the General Assembly may hold more joint hearings on pensions, in addition to the two that have already occurred.

The problem — which the General Assembly will likely convene a special session to address — is the growing gaps between the funds that the state and its municipalities have set aside to fund their pension plans and the amounts promised to public employees. The discrepancies between promised and available funds threaten both government solvency and the retirement security of thousands of workers.

The hearing yesterday focused entirely on municipal pension plans, which are more challenging to reform than the state-run pension plan, according to State Auditor General Dennis Hoyle and General Assembly fiscal advisers Peter Marino and Sharon Ferland, who led the hearing.

One critical challenge to reform is the sheer number of unique plans that exist in the state. Municipal pension plans are divided into two basic categories. The state-run pension system includes 110 municipal pension plans covering public employees in the state's cities and towns, in addition to the pension plan for state employees. While the state administers this group of municipal pension plans, known as the Municipal Employees Retirement System, local governments are responsible for ensuring their plans stay funded.

But the outlook is most dire for the 36 municipal plans not included in the state system. In 2010, these plans were 40.3 percent funded overall. Two-thirds of these municipal plans — including those of Cranston, Pawtucket, Providence and Warwick, the state's largest cities ­— are considered "at risk" by the state's auditor general.

These "at risk" plans are further divided into four categories of severity, from "I" indicating bankruptcy to "IV" indicating that local governments are making contributions representing less than 80 percent of the amount required to maintain the plans at an adequate funding level. With an $828 million unfunded pension liability, Providence has been designated a "III" in this system.

"Not all of the news is necessarily bad," Marino said, pointing to four local examples of plans that are nearly fully funded.

As with state pensions, Marino said it is very unlikely that growing investment returns would allow municipalities to grow out of their pension liabilities. He added that bond rating agencies' negative growth outlooks for Rhode Island municipalities will probably increase the municipalities' borrowing costs.

Reforming pension plans administered by the state will be far easier than reforming independent municipal plans, Marino said. The state can withhold funding for plans in the state-run system if municipalities fail to meet 100 percent of their annual required contribution. Local governments currently cannot be penalized for failing to meet their required contribution and instead are only required to send documentation to the state. "It's sort of a paper chase," Hoyle said. He added that forecasting needs to be updated to reflect current figures, such as increased longevity, which has an adverse effect on unfunded liabilities.

Rep. Frank Ciccone, D-Providence and North Providence, pointed to the profitable business financial advisers have made of the state's pension problems. He said the $156 million paid to financial advisers could be "creating a problem."

Several members of the committee recommended reducing the number of plans and pension consultants as a way to rein in unfunded liabilities. "There's tremendous opportunity for consolidation," Hoyle said. Absorbing local plans into the state system is also an enticing option, he said, though the 100 percent required contribution mandated in this system will make transferring pension plans from local to state control difficult for more financially troubled local plans. "The distance seems insurmountable in (the) near-term," Hoyle said.


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