While Rhode Island’s political leaders wrestle with state pension reform, there’s another big pension headache out there –– the soaring cost of municipal pensions.

A new study by the business-backed Rhode Island Public Expenditure Council reports that the amount of money that communities spend on pension costs has increased nearly 50 percent in the past five years, from $101 million in 2004 to $149 million in the current fiscal year ending June 30.

That’s bad news for cash-strapped cities and towns faced with difficult choices involving service cuts, tax hikes and reduced state aid, as they are being forced to devote a larger percentage of their stretched budgets to pension costs. From 2004 to 2009, the study says, municipalities saw pension costs grow to nearly 11 percent of their operating budgets, from about 9 percent. And that’s not counting costs for education and teachers’ pensions.

By comparison, the state government, for all its pension woes, is spending 7 percent of its operating budget on pension costs this year.

Local pension costs ate up anywhere from 0.9 percent of this year’s municipal budget in Exeter to 21.3 percent in Cranston. Eight other communities were in double digits: Portsmouth (10 percent), Middletown (11.2), Coventry (12.7), Newport (12.8), Central Falls (12.5), Johnston (14.8), Providence (14.9) and Warwick (17.3).

The study doesn’t reflect the recent hit to pension funds from the recession.

“If the stock and bond markets do not rebound quickly and the recession continues, local leaders will be faced with difficult choices to shore up pension funds that have lost a large amount of value in recent months,” the report warns.

To control local pension costs, RIPEC urges a review of the current system’s funding and structure. The report points to several reforms proposed by Governor Carcieri pending in the General Assembly. Those include raising the minimum retirement age for municipal employees, tightening benefits and increasing employee contributions to conform with the statewide Municipal Employees Retirement System (MERS), which is in much better financial health.

“We can’t do business as usual anymore,” says RIPEC policy director Susanne Greschner, who wrote the report. “Local government has to think hard about reducing its pension costs. We need a plan for spending the taxpayers’ money, and we need to start now.”

The study found that locally administered pension plans were able to fund only an average of 45 percent of their obligations as of June 30, 2006, with an unfunded liability of $1.6 billion. That encompasses quite a wide range, from a Coventry police pension plan that is only 7.9-percent funded, to the Jamestown police pension plan, which is over-funded, at 123.9 percent.

By comparison, plans in the statewide MERS were able to cover 90 percent of their obligations, with an unfunded liability of $114 million.

The reason: as a larger plan, MERS is able to reap higher investment returns and lower costs, and also requires municipalities to fully fund their pension obligations.

The problem for the locally administered plans, says Greschner, is that some communities have resisted ceding control over pension issues in local union contracts, while others, already hard pressed to keep up with their pension contributions, cannot afford to make the 100-percent contributions required to be a part of MERS.

Currently, the state administers MERS for 110 municipal pension plans in 30 communities. An additional 37 pension plans in 25 communities are locally administered, but they include some of the largest ones in Rhode Island, including Providence, Warwick and the police and firefighters plans in Cranston. (Cranston police officers and firefighters hired after July 1, 1995, are enrolled in the state-run system.)

The Employee Retirement System in Providence, the state’s largest local pension plan, could meet just 37.4 percent of its obligations, with $393 million in assets and just over $1 billion in liabilities.

As an alternative to joining MERS, the RIPEC report points to Carcieri’s proposal that locally administered plans adopt MERS guidelines on retirement ages and increased employee contributions.

The governor has proposed legislation requiring communities who don’t keep up with their contributions to locally administered plans to move new employees into MERS. But that legislation went nowhere last year, as communities questioned the governor’s authority to dictate to municipalities and also fretted that pulling new employees out of local pension systems would make it harder for cities and towns to finance the pensions of their remaining workers.

The RIPEC study also found that the bulk of municipal pension contributions, excluding teachers, went to police and fire employees –– 8 percent this year of general fund expenditures, or $111 million, compared with 2 percent, or $29 million, for other municipal employees.

RIPEC is sending copies of the study to the governor, legislative leaders and union officials.

“Municipal pensions have not gotten the same scrutiny as state pensions,” says Greschner. “It’s very important to keep this on the front burner. Sometimes all you need is the data to frame the debate.”Paying for pensions

The 1 0 Rhode Island communities that spend the highest percent of their annual budgets on pensions:

Source: RIPEC

mstanton@projo.com