PROVIDENCE, R.I. (WPRI) — The proposed $500 million pension obligation bond in Providence is one step closer to being authorized by the state, even as increasing interest rates raise questions about if and when the money can be borrowed.
The House Finance Committee approved an amended version of Providence Mayor Jorge Elorza’s bond proposal Thursday evening, sending it to the full House for a floor vote. (On the Senate side, the bill has been heard in committee but no action has been taken.)
Elorza’s plan requires General Assembly authorization because the amount proposed is above the city’s borrowing capacity. Once borrowed, the massive influx of cash would be invested in the city’s pension system, which has an unfunded liability of more than $1 billion.
The city sends an ever-rising chunk of its annual budget into the fund, which Elorza warns will eventually cut into funding for crucial city services.
Before approval, the House Finance Committee amended the bill to require that the money only be borrowed if the interest rate is less than 4.9%, a slight decrease from the 5% cap in the original bill.
The success of the pension bond hinges on the idea that the interest rate on the debt is lower than the rate of return the state expects it can make on its investment of the borrowed money.
The amended version of the bill also requires the city to deposit $10 million into an account for other post-employment benefits — health insurance for retirees — which also has a large unfunded liability.
The updated legislation also further clarifies that until the bonds are paid back, or the pension is 100% funded, the city cannot approve any union contract “which has the effect of shifting pension benefit costs from employees to the city.”
The enabling legislation also requires that the bond be approved by a majority of city voters in a special referendum on June 7, even if the law passes before the election.
“The city is supportive of the [amended] legislation that was voted on tonight by the House Finance Committee,” said Theresa Agonia, a spokesperson for Elorza.
“As we have stated from the beginning, we will only pursue the POB if all of the guardrails are met, including the interest rate cap,” she added.
General Treasurer Seth Magaziner, who had opposed a different and more expensive version of a pension bond last year, recommend a series of new guardrails to lawmakers this time around, some of which were incorporated into the new bill.
But Magaziner — who is also a Democratic candidate for Congress — had recommended a 4.5% maximum interest rate and that the issuance of the bonds be staggered, which was not included in the amendment.
“Timing is important, and if proceeds from a [pension obligation bond] are invested shortly before a significant stock market decline, investment earnings may fall short of the cost of borrowing the POB,” Magaziner wrote in a letter to lawmakers earlier this year.
Magaziner lives in Providence, but has not yet decided how he will vote in the special referendum on the bond, according to spokesperson Ben Smith.
The bill gives the city five years to borrow the money before the bond will no longer be authorized, which means it might not happen during the Elorza administration that ends in January due to term limits.
Elorza has said the city wouldn’t float the bonds if market conditions don’t make sense, and it’s possible interest rates will be too high to stay under the 4.9% stipulated in the legislation by the time it is approved.
All three of Providence’s mayoral candidates said Thursday they will be voting in favor of the measure.
“For all voters, I encourage you to vote YES on Question 1,” said Councilwoman Nirva LaFortune, one of the Democratic mayoral candidates. “I was cautious at first of this proposal from the mayor – we’re taking out a loan to pay a debt.” But she said the guardrails in place, including the interest rate cap, make it a “viable option.”
Candidate Brett Smiley, also a Democrat, said he intends to vote for the bond but remains “cautious about the proposal as a whole.”
“While I think this is an important tool for the next mayor to have in their toolkit to address our pension obligations, I don’t believe it is the only solution and believe that voter approval is an important first step,” Smiley said.
Gonzalo Cuervo, also a Democrat, also said he’ll vote in favor of the referendum.
“POBs are not an ideal solution but this one, with safeguards in place, can help bring our pension system up to a sustainable funding level,” Cuervo said.
A union-funded group called the Committee to Save Providence has been campaigning in favor of the bond vote, spending thousands on field organizing and a campaign mailer.
No organized efforts against the referendum have been reported so far to the Board of Elections.
Providence voters can cast early ballots in the special election at City Hall until June 6, on weekdays from 8:30 a.m. to 4:30 p.m.
They can also vote on Election Day on June 7, when polls will be open from 7 a.m. to 8 p.m. Those who have mail ballots at home must return them before polls close.