PROVIDENCE, R.I. (WPRI) — Providence Mayor Jorge Elorza was peppered with questions from lawmakers Tuesday night as he seeks their approval to borrow more than $500 million to invest in the city’s ailing pension fund.

This was the second time Elorza has proposed a pension obligation bond, which also has the support of City Council President John Igliozzi. The two argued the proposal has changed for the better since last year, and several previous doubters — including state Treasurer Seth Magaziner — have come around to the idea.

Elorza and Igliozzi sat side-by-side before the House Finance Committee urging them to consider authorizing the city to borrow the money. The funds would not come from the state, but General Assembly approval is required to let Providence borrow above its usual capacity under state law.

“We’re not looking for a state bailout, we’re not looking for a state guarantee, we’re not asking the state to step in in any way,” Elorza told the panel. “Doing nothing is not an option.”

The basic idea is that the interest rate on the pension obligation bond would be lower than the expected rate of return on the pension fund’s investments, therefore saving money as the city works to bring the fund out of “critical status.” But it also depends on the ups and downs of the financial markets, inherently carrying risk.

Igliozzi gave the legislators a chart showing that since its inception in 1996, the pension fund’s rate of return has been 7.4%, higher than the expected interest on the debt. (The fund assumes an average annual 7% return based on actuaries’ calculations.)

“If we don’t solve our problem it does have an impact on all of you,” Igliozzi said. “I don’t want the city of Providence to be a burden on all of you.”

The proposal has changed since last year, when the bill would have allowed the city to borrow up to $850 million. This time around, following the recommendations of a working group that met over the past year, Elorza is requesting authorization to borrow $515 million.

The city also plans to ask voters about the matter in a special election on June 7, which was not part of the proposal last year. The referendum is nonbinding, but city leaders argue it would signal whether Providence residents favor the plan.

This year’s legislation also contains multiple new guardrails, including that the interest on the bond cannot exceed 5%. (The city’s top financial officer says he anticipates an interest rate around 4.3% or 4.4%.)

House Finance Committee members asked Elorza a litany of questions, including what was being done with the parallel unfunded liability for retiree health care, whether the city was considering bankruptcy, and whether Providence could borrow a smaller amount that wouldn’t put it above its borrowing cap — thereby eliminating the need to ask the General Assembly for approval at all.

Elorza and Igliozzi both said they were not willing to max out the city’s entire existing borrowing capacity — a total of $225 million — on a pension obligation bond, since the city also borrows money for infrastructure projects.

Elorza’s chief financial officer Larry Mancini said Providence would not qualify for bankruptcy because the city is not insolvent and can currently pay its bills.

Elorza also sought to contrast Providence’s plan with a pension obligation bond that was floated in the 2000s by the city of Woonsocket, which critics have called a failure.

Providence’s plan includes an option to refinance the loan after 10 years if interest rates are lower, which Woonsocket did not have, Elorza said. He also said Woonsocket borrowed the money at 6.23% interest and had an “unrealistic” assumed rate of return above 8%.

Providence’s pension fund, with assets worth $396 million as of January, is woefully underfunded.

The gap between what Providence has invested to pay its retirees’ pensions and how much the city will actually owe the retired workers over time is roughly $1.2 billion. The problem was caused over decades where multiple mayoral administrations promised retirement benefits to workers but did not put away enough money to fund them.

Elorza’s administration has made the full actuarially determined contribution — currently at $93 million — each year. But the payment is scheduled to increase by an average of 5% each year, which Elorza and Igliozzi argue would squeeze out other city services in the budget since revenue only grows by 2% annually.

According to Mancini, the pension fund is currently slated to get to 60% funded by 2035, when the city’s annual payment into it would hit $183 million. The pension obligation bond would allow the fund to be 60% funded by 2026, Mancini said, with the annual payment — including debt service — at $100 million.

Leaders from three of the city’s labor unions also testified in favor of the plan, pointing out that they negotiated significant concessions to try and make the pension fund more sustainable moving forward. But the bulk of the unfunded liability comes from city workers who have already retired, not current union members.

Members of the Providence Firefighters Union have agreed to increase their pension contributions to 16% of their pay over the next five years, and also pay more for their medical benefits in a new collective bargaining agreement expected to be approved by the City Council this month.

“When I come to you and I say this is the only option left, it truly is,” said Derek Silva, president of the firefighters union, testifying in favor of the pension bond. “We’ve left no stone unturned, we’ve shuffled every deck chair we possibly can. And there’s nothing left to do but to let Providence fix their own problem.”

The Providence police union has similarly agreed to increase their pension contributions to 13.5%.

The committee received testimony in opposition to the plan from Steven Frias, who represents Rhode Island on the Republican National Committee. He argued pension obligation bonds should be avoided.

“They are high-risk, highly dependent on timing, and can fail miserably,” Frias wrote. He argued the bond could turn into a “fiscal fiasco,” and Providence should instead reduce benefits for pensioners.

But several people who previously testified against the legislation changed their tunes this time around.

Magaziner — who last year objected to the proposal as a “gamble” and lacking a clear plan for mitigating the risk — this time offered advice for legislators to mitigate the risk.

In a letter to the committee, Magaziner recommended legislators reduce the maximum interest cost from 5% to 4.5%, limit the length of the bond to 25 years and require that the bond either be borrowed or invested in smaller chunks rather than all at once.

Responding to a question from Finance Committee Chair Marvin Abney, Elorza said he would be willing to agree to a slightly lower cap on the interest rate.

He also noted that the final approval would come from the City Council, and the money would not be borrowed if conditions are unfavorable, even after General Assembly and voter approval.

And what if interest rates are higher than expected?

“It won’t happen,” Igliozzi said. “The City Council won’t allow it to happen.”

Two other prior skeptics — former city councilor and current state Sen. Sam Zurier and Michael DiBiase, head of the Rhode Island Public Expenditure Council — are also now in favor of the pension bond.

Both men served on the working group that studied the potential alternatives and came up with the new proposal.

“This pension obligation bond we believe is worth the risk,” DiBiase said, citing the new guardrails.

No vote was held on the legislation, and a hearing has not yet been scheduled in the Senate.

Steph Machado (smachado@wpri.com) is a Target 12 investigative reporter covering Providence, politics and more for 12 News. Connect with her on Twitter and on Facebook.