Paying off all liabilities would cost city $409 million
Published Nov. 23, 2011
By Sean Flynn/Daily News staff
If the city of Newport decided this year to fully fund trust funds to pay all the pension and health insurance benefits promised to current city and school employees and retirees, it would have to come up with $409.19 million - or $16,585 for every man, woman and child in the city.
Since that total amount is the equivalent of more than five annual city budgets, minus the water and sewer enterprise funds, fully funding the liability anytime soon is not a realistic option. Financing that debt into the future presents a major challenge for city officials, however.
The firefighters pension fund currently has a liability of $82.03 million, of which $30.82 million is funded and $51.21 million is unfunded. The state put the Newport firefighters pension fund on its "watch list" of 24 independently administered plans it considers to be at risk because just 37.6 percent of its total liability was funded as of July 1, 2010, city Finance Director Laura Sitrin said recently.
The police officers pension fund has a liability of $74.87 million, of which $42.24 million is funded and $32.63 million is unfunded. The police pension plan's total liability is 56.4 percent funded; it also is considered at risk by the state.
The state-run Municipal Employees' Retirement System covers the pensions of all municipal employees and managers in Newport other than police officers, firefighters and teachers (teachers are in the state-run Employees' Retirement System of Rhode Island). Newport's share of the liability in the MERS fund is $75.09 million, of which $45.26 million is funded and $29.83 million unfunded. Since 60.3 percent of that liability is funded, it is in a stronger position than other trust funds in which the city is involved.
The MERS system faces new restrictions imposed by pension-reform legislation approved last week by the General Assembly and signed by Gov. Lincoln D. Chafee. (See accompanying story.)
Outside of the pension systems, the city has set up a 30-year payment schedule to fund the full cost of promised health care benefits to retirees through its Other Post-Employment Benefits Trust Fund. The city's total liability for health insurance benefits for all its retirees, including teachers and other School Department employees, stands at $150.08 million. Of that amount, $13.95 million is funded and $136.13 million is unfunded. The total liability for OPEB is 9.3 percent funded.

Police and fire liability
The city's total liability for the independent firefighters and police pension funds, its contributions to the state pension system and OPEB is $382.06 million, of which $132.27 million is funded and $249.79 million is unfunded. That means only 34.6 percent of the total liability is funded.
Newport City Council Vice Chairman Justin S. McLaughlin drew up a table of the city's unfunded liability using these figures, which Sitrin provided. He also calculated Newport's share of the unfunded liability for the state-run ERS, which covers teachers as well as state employees. Using the per-capita cost for the state as a whole and the 2010 Newport population of 24,672, the city's share of the statewide liability adds another $159.39 million to its overall liability, he said.
That would mean Newport's share of the total unfunded liability for all municipal and state pension and health-benefit programs would total $409.19 million, according to McLaughlin's calculations, which were done before passage of the pension overhaul bill designed to decrease the state's unfunded liability. All the figures come from Sitrin and the state general treasurer's office.
Calculating unfunded liabilities is based on a series of actuarial assumptions, Sitrin noted. For example, the city was assuming that its earnings on invested assets would average 8.25 percent until two years ago, when it dropped the assumed earnings to 7.5 percent. That meant the projected unfunded liabilities increased. That same revision of expected earnings at the state level increased the state's projected unfunded liability.

Municipalities have options
Other variables include the value of the promised benefits, the employees' retirement ages, salary increases and amounts contributed by employees. If any of those variables change, the projected unfunded liabilities also change.
There are steps local governments can take to reduce pension and OPEB liabilities, but they are difficult politically. Increasing employees' contributions toward their pension and health costs, reducing benefits and increasing retirement ages are unpopular options, but some of those changes were implemented at the state level by last week's legislation, effective on July 1, 2012.
The city's pension funds are not affected by the state overhaul, but Newport firefighters accepted an increased pension contribution and a higher retirement age for new hires in a contract negotiated earlier this year.
Before the early 1990s, pensions were paid out of communities' general operating budgets in what was known as a "pay-as-you-go" system. Whatever was owed retirees in that fiscal year was paid from current employees' contributions toward their retirement. If that amount was insufficient, taxpayers made up the difference through the general fund.
With pension payments from operating budgets increasing every year, the decision was made to fund pensions through trust funds. A 30-year payment schedule was set up to pay off the accumulated pension debt, with communities required to make annual payments to cover both the pensions and the contribution to the trust fund. Eventually, the plan was to fully fund the pensions through the trust fund monies, which would be invested and accrue earnings.
The Governmental Accounting Standards Board does not have the same requirements for health care trust funds as it does for pension trust funds. But if communities do nothing and continue to pay the benefits from their operating budgets, accrued liability will climb steeply. All municipalities now must list their promised health care benefits as liabilities when they apply for bonds, which could lower their bond ratings and force them to pay higher interest rates when they borrow.
The city established an OPEB Trust Fund five years ago to amortize its health care benefit liability similar to pension funds. The fund is amortized over a 30-year period.

Current benefit costs
While the amounts owed for benefits in future years are daunting, what the city is paying toward benefits for active employees and retirees in fiscal 2012, which began on July 1, also is significant.
The cost of active employee health insurance this year totals $5.06 million on the municipal side of government. Except for firefighters, the cost of a family health insurance plan is $18,532; an individual plan costs $7,669. Employees, for the most part, pay less than 10 percent of those costs. Employees in management pay 15 percent of the premium.
The firefighters health plan is similar in costs: $18,647 for a family plan and $7,720 for an individual plan. The city pays out a total of $21,000 a year to employees who opt not to subscribe to the city's health care plan.
In addition to the current health care costs, the city this year paid $2.5 million into the OBEB Trust Fund as a partial payment toward the large unfunded liability. The city also paid $1.76 million toward police retiree health insurance and $1.42 million toward firefighter retiree health insurance. For retirees other than fire and police, the cost was $1.05 million for health insurance.
The various current pension costs also add up quickly:
- The city will pay $3.52 million toward the unfunded fire pension liability and $2.03 million toward the unfunded police pension liability in the current fiscal year.
- In addition, the city will pay what it calls the "normal cost" to the fire pension fund of $1.04 million, based on having 88 active firefighters, and the "normal cost" to the police pension fund of $866,436, based on having 78 active police officers. Actuaries calculate those figures. The total pension payment - unfunded pension liability cost plus the normal cost - is called the "annual required contribution" toward the pension plan. The ARC is $4.56 million for firefighters and $2.9 million for police in the current fiscal year.
- The city will pay $1.56 million into the state-run MERS in the current fiscal year, based on 167 active employees other than firefighters and police officers.
All those costs will be paid into the pension funds in the current fiscal year; they are not the total benefits that will be paid to retirees this fiscal year. That figure can fluctuate and will not be available until later in the fiscal year. For comparison, however, in fiscal 2010, 112 firefighter retirees were paid a total of $4.8 million in benefits and 113 police retirees were paid a total of $3.82 million in benefits.
The city will pay an additional $310,082 for dental insurance for active employees, and $36,456 for employees' life insurance in the current fiscal year. Payroll taxes for city employees, including the Federal Insurance Contributions Act (FICA) tax for Social Security and Medicare payment will total $798,263 in this fiscal year.

School Department benefit costs
The School Department also carries benefit costs, with the highest individual cost being for health insurance. In fiscal 2012, the department will pay $3.17 million in health insurance for active employees. That will cover 222 of the 299 active employees in the department.
Because health insurance is so expensive, the School Department offers employees and retirees an incentive payment not to take health insurance. It is called a "buy-back" provision in the labor contracts.
Teachers receive $5,800 not to enroll in a family plan, or $4,062 not to enroll in an individual plan. Non-teaching personnel receive $6,000 not to enroll in a family plan and $3,000 not to enroll in an individual plan. Paraeducators receive a buy-back payment of $3,925 for non-enrollment in the family plan and $1,625 for non-enrollment in the individual plan. The corresponding payments for administrators are $3,000 and $1,500. Retirees also can receive payments not to subscribe to health insurance through the School Department.
In fiscal 2011, the School Department paid a total of $440,073 to active employees and $244,059 to retirees to "buy back" their health insurance, a total of $684,132.
The buy-back payments were a controversial item in this year's budget process in May and June. School Committee member Robert J. Leary, an opponent of buy-back payments, said he called each of the City Council members to inform them of the almost $700,000 the School Department paid out to make these payments.
Councilwoman Jeanne-Marie Napolitano said she did not support the School Department's request to have its budget restored to the fiscal 2010 level, before cuts were made in fiscal 2011, because of those payments.
The buy-back provisions only can be eliminated through the collective bargaining process, since they are part of School Department labor contracts.
The department budgeted $215,103 for dental insurance in the current year, and $16,689 for dental buy-back payments.
The School Department will pay a total of $2.13 million in retirement costs for payments to the state-run Employees' Retirement System that covers teachers and the Municipal Employees' Retirement System that covers non-teaching personnel.
Other benefits costs for the department are $262,437 for Medicare, $184,970 for Social Security and $78,145 for life insurance. Finally, the department pays $131,002 in workers compensation costs and $20,404 for survivor benefits.
Former interim School Department business manager John Souza calculated average total benefit costs per department employee at $22,045 in the current fiscal year.

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