WARWICK, RI — The Warwick City Council Finance Committee got some good news during a report on an Other Post-Employment Benefits – OPEB/Pension plan Monday to fully fund the respective $397M and $353M obligations within 30 years.
Joe Newton, with the city’s actuarial firm, Gabriel, Roeder Smith & Co. (GRS) of Southfield, Mich., presented the report, pointing out the good news first, in respect to the Municipal (78 percent funded), Fire II (84% funded) and Police II (81.6% funded) pension plans. Newton noted the two which are 80% or more funded, with Municipal nearly so, and told the Committee that level of funding, while not complete, is generally regarded as a healthy level of funding. He noted how all three had grown between the 2021 and 2022 valuations.
“We want to see the funding ratio getting better year over year, and they all did,” Newton said.
The least-funded plan, he pointed out on slide 4, is the Police/Fire 1 plan, also the oldest, closed to new members, with a declining number of beneficiaries funded on a pay-as-you go/unfunded basis in the 1990s. That approach had to be adjusted to a 30-year payment plan, which has about 15 years left in it. It’s currently funded at 24%, Newton said.
That number hasn’t changed much since Newton reported it (as reported by Warwick Post) in 2016, when the closed Police and Fire I plan had increased to 25 percent (up from 24 percent in 2015) under the city’s 40-year advance funding plan. In 2013, The Providence Journal reported the plan was funded at about 20 percent. At the time, Newton said if the city remains on the current schedule, the Police and Fire I Plan will be fully funded by 2036.
Monday, Newton said the plan would be fully funded in another 15 years, which would be 2037.
OPEB Liability & Police/Fire 1 Pension Funding
The city’s unfunded medical benefits for retirees, Other Post-Employment Benefits – OPEB, meanwhile, is $397.4 million. Beneficiaries for that plan include retirees receiving medical benefits, and that plan, similar to the original Police/Fire Pension 1 plan, is funded pay-as-you-go.
Assuming the Police and municipal unions sign on to an agreement similar to the one with the firefighters union the City Council ratified Jan. 30, all three union’s employees would contribute to an OPEB trust, starting with the firefighters, as early as the final six months of the current Warwick Firefighter’s Union contract, ending in June 30, 2025.
Long discussed, routinely recommended yet never committed to, an Other Post-Employment Benefits (OPEB) trust would provide a way to move from the city’s current pay-as-you-go method of funding the OPEB liability.
Step 1: Move Police/Fire Pension 1 to Pay-As-You-Go, Save Costs
Newton’s plan would modify the Police/Fire Pension 1 plan, moving it back to a pay-as-you-go, but “modified” given the plan’s stability. Since that plan is predictable and declining, resources the city is putting into that plan can be reduced. This year, for instance, the city’s contribution to the Police/Fire Pension 1 plan is $20.6 million, then $21.7 million in 2024, and $22.6 million in 2025.
By moving that pension plan to his pay-as-you-go plan, splitting the $304.8 million Police/Fire Pension 1 Plan into a fully funded portion, $73.3 million, and an unfunded liability of $231.5 million, the funding required in 2024 would only be $19.1 million.
Step 2: Set FY23 as baseline retirement contribution
Next, Netwon proposes setting FY23’s combined pension contribution, $52.4 million, as the baseline pooled contribution amount for all retirement programs. From there, the cit would:
• Set an annual growth rate that the city can sustain (2.50% per year)
• Use that growth rate to determine a total amount to be contributed across all the programs – $52.4m * 1.025 = $53.7m for FY24, for example.
From there, any balance left over each year would be deposited into an OPEB trust.
Projecting an annual rate of return of 2.5%, the balance added to the OPEB trust would range between $700,000 and $1 million in the first three years, then $6.3 million in year four, growing to $10.6 million contributed in 2033, according to Newton’s report.
Step 3: Dedicate meaningful funding to OPEB Trust
With meaningful funding dedicated to the OPEB Trust and up-front seed money, $5 million, the Trust would be able to immediately use the assumed investment return as the discount rate for determining the balance sheet liability for the OPEB plan, 6.9% as opposed to 3.69%.
“That would be $142 million dollars of liability off the balance sheet immediately,” Newton said.
By switching to his OPEB/Pension plan, Newton said, the city could fully fund its OPEB liabilities and fully fund all but the Police/Fire 1 Pension within 25 – 30 years, Newton said.
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