Warwick, RI — Hours after Mayor Scott Avedisian announced positive news about Warwick’s pension plans on March 7, some City Councilors questioned his evaluation.
Three councilors said the city’s funding formula is insufficient, based on a 7.5 percent rate of return, but an actuarial consultant assured them the estimate was reasonably below the last five years’ performance of 10 percent, meaning the city is on the right track for covering its pension obligations.
Early that morning, Avedisian’s office announced the city’s actuarial firm, Gabriel, Roeder Smith & Co. (GRS) of Southfield, Mich., reported the funded levels of all four of the city’s pension funds: Municipal, Police/Fire I, Police II and Fire II, had grown as of July 1, 2015.
The funding levels for the city’s open plans are:
Fire II: 93 percent (up from 83 percent in 2014).
Police II: 89 percent (up from 81 percent in 2014).
Municipal: 75 percent (up from 70 percent in 2014).
The closed Police and Fire I plan has increased to 25 percent (up from 24 percent in 2015). In 2013, The Providence Journal reported the plan was funded at about 20 percent. If the city remains on the current schedule, the Police and Fire I Plan will be fully funded by 2036.
According to GRS, plans funded at 80 percent and above are healthy and financially stable. Excepting Police and Fire Plan I, the pension plans were the only ones in the state considered “Tier 1” in 2014.
The total unfunded liability for all plans has decreased by $6.4 million, with the largest decrease of over $2.7 million occurring in the Police and Fire I plan, according to the Mayor’s office. The City’s total unfunded pension liability as of July 1, 2015 was $271 million.
“Of course, the target is 100 percent (funding) so we can’t say that we’re done,” said Joe Newton, a consultant with GRS, during Monday night’s meeting as he presented the news to the City Council.
During the meeting, Councilman Steve Merolla noted that Fiduciary Investment Advisors, the firm managing the funds in the pension plan, have estimated the rate of return for the Police II pension fund at 5.6 percent. He suggested that the funding schedule for the plans (increasing 2.75 percent per year), based on a projection of an average rate of return of 7.5 percent per year over 20 years would be too low.
Councilmen Joseph Solomon and Edgar Ladouceur also questioned the wisdom of funding the plans based on a 7.5 percent rate of return.
Newton disagreed, repeating that the projection was an average, spread over a 20-year period. He pointed out the projection allows for both lower and greater returns than the average over time.
“The one decade has nothing to do with the other decade,” Newton cautioned. He said a 7.5 percent rate of return is still lower than the average projection.
Merolla pressed his point, asking Newton what the rate of return on the funds had been since July 1, 2015. Newton said there had been no rate of return since that date.
Merolla also asked Newton to confirm that the Police II pension fund had paid out $1.39 million in the third quarter, and the rate of return on the fund had also decreased $10.6 million. The result, he said, was that the fund value had decreased by $12 million, from $178 million to $166 million. Newton acknowledged his numbers were correct.
Earlier in the evening, Newton pointed out that the funding formula is set up to absorb under-performing periods of return on the pension funds, because it also accounts for over-performing years.
“That loss will go right into the formula,” Newton said. “It is important to point out that in the five-year period, the funds have [returned an average of] 10 percent.”
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