Rhode Island pension systems have sustained heavy losses as a result of the global financial crisis and government officials are keeping a close eye on the long-term implications.

The state is reporting a 25-percent, or $2.1 billion, loss in its pension fund since Jan. 1. Nationally, state pension systems are reporting losses between 20 and 40 percent; the 25 Rhode Island municipalities that manage their own pensions are faring no better.

Among the communities feeling the impact the hardest is the City of Providence.

The city pension fund has lost more than $100 million, or 30 percent, from September 2007 through mid-November of this year, according to city officials. That leaves the pension system, which must pay out at least $60 million to more than 2,900 retirees and beneficiaries this year, with just $243 million.

“The train is moving off the track,” says City Councilman John J. Igliozzi, chair of the city Finance Committee. “The time it will take to get the fund to hit zero is getting closer. Pretty soon it will turn into a pay-as-you-go system.”

In Providence, the pension system’s unfunded liability –– the gap between its assets and its obligations –– has been historically high, and is expected to widen in light of market woes.

It’s sobering news, considering that all indicators point to rising pension costs: a more health-conscious population is living longer than previous generations, the massive baby-boom generation has reached or is approaching retirement age, and government salaries in general have been on the rise.

Besides Providence, eight other municipal pension funds in the state are significantly underfunded, according to the state auditor general’s office. They are Coventry, Cranston, Johnston, Newport, Pawtucket, Warwick, Westerly, and West Warwick.

Many communities in recent years have sought to address growing liabilities, but the turn in the market threatens to stall their progress.

Pawtucket, for example, will start contributing $8 million annually toward its pension system next fiscal year, nearly doubling what it was contributing this fiscal year and helping the fund inch toward being fully funded.

But how soon it can reach that goal depends on how quickly the market recovers.

“The market conditions are definitely hurting us,” says Pawtucket Finance Director Ronald Wunschel. “Our funding ratio [percent funded versus percent unfunded] will definitely go down next year. We’ll just have to see by how much.”

GOVERNMENT PENSIONS, which promise a fixed amount of money each month, are financed in different ways. Most are a combination of employee contributions, employer (the state or municipality) contributions and the interest from the fund itself. If a fund is large enough, the interest can take considerable pressure off a municipality, but most have major gaps between what they have and what they need.

With the market woes, officials on the state and local levels are taking a harder look at their pension portfolios.

State Treasurer Frank T. Caprio says that the state’s nine-member Investment Commission is having its consultants reexamine how the portfolio is invested.

The state is in a better position than most communities since it pays the full, recommended amount each year into the pension system, assuring that the fund grows even as the state pays out to retirees and beneficiaries.

The state pension system pulled out of risky investments tied to subprime mortgages nearly one year before the housing market collapsed and has not made any investment in other high-risk funds (particularly hedge funds), says Caprio.

Caprio says he’s not concerned about pensioners not getting their benefits. Even with azero- percent return on investment over the next 30 years, he says, the system could cover its obligations.

Providence’s Board of Investment Commissioners has asked the city’s investment consultant, Wainwright Investment, to recommend a series of conservative moves to lower the city’s market exposure.

“We’re cognizant of where things are at, but we will not overreact,” says City Finance Director Bruce Miller. “We’ll play it conservative for now. You can’t take today’s financial market and estimate for future moves. It’s not real dollars.”

That appears to be the general consensus among communities.

Pension investment boards in other Rhode Island cities and towns have taken to meeting more frequently to monitor the market, and making slight adjustments to their mix of investments, but no one is making any bold moves.

Few municipalities bought into riskier investments, and if they did, it was in small percentages.

“We’re reviewing the market and trying to stay on top of it to the degree that we can,” says East Providence Finance Director James McDonald. “But we don’t want to panic and pull everything out of the equity market, for example. There are no magic bullets.”

PROVIDENCE’S PENSION woes reach far back, and can be attributed to some old, bad habits shared by other municipalities.

Some years, the city did not pay into the system the amount it should have to keep it growing. Some years, it didn’t pay anything at all. It was also a very generous system for perhaps long past the point it could afford to be, say city officials.

Mayor David Cicilline’s administration has made strides to reform the system, including closing loopholes in the pension laws, raising the interest rate on pension loans, and requiring those receiving accidental disability pensions to be certified annually.

But despite its best efforts, the city this year will pay nearly 80 percent, or $46 million, of its pension obligation from the general revenue fund, up from about $43 million from the previous year. And that percentage of money from general revenue is likely to grow as the city’s annual payout to retirees increases.

The problem is that the $60 million the city is paying out today cuts into the principal.

Also coupled with that is the fact that there are fewer employees paying into the system while the number of retirees is growing. Currently 3,008 employees are contributing while 2,907 are collecting benefits.

All of this makes it harder for the city to meet its obligations.

“It shortens the lifeline of the pension fund,” says Igliozzi. “The system can’t survive this way.”

Wainwright Investment predicts about nine more months of market fluctuations before the city sees a return to “normalcy” in regards to expected returns on investment, Miller says.

“Pension investments are structured to the long term. When you react to markets [in the short term] is when you get problems,” said Miller. “When we need the money, 25 years or so down the line, it will be there.”

pmarcelo@projo.com