PROVIDENCE, R.I. (WPRI) — Moody’s Investors Service this month said Providence’s “deeply underfunded pension” remains its top budgetary challenge, even as the city’s financial picture has improved in recent years.
The credit agency predicted that Providence’s annual payment to the pension fund — already about 14% of the city budget — will soar over the next decade to keep up with the costs of paying out pensions to the city’s retirees.
Mayor Jorge Elorza is expected to propose a budget for the next fiscal year on Tuesday. He recently negotiated a new collective bargaining agreement with the police union, securing pension changes that will require the officers to contribute 13.5% of their pay to the pension fund by 2022, in exchange for significant pay raises. (The officers were previously contributing 8%.)
“The ability of the City of Providence to accommodate rising pension costs in its budget will heavily
influence its credit quality because the city has very limited capacity to pull back on contributions,” Moody’s wrote in its U.S. Public Finance Outlook report earlier this month.
The gap between what Providence has invested to pay its retirees’ pensions and how much the city will actual owe the pensioners over time is roughly $1.2 billion. That number doesn’t include the additional unfunded cost of retirees’ health care, known as other post-employment benefits (OPEB).
The city reported a pension fund balance of $381 million earlier this week, amid a steady climb in its value during 2021, after the fund plunged to $263 million when the pandemic hit last spring.
Providence anticipates contributing $90 million of its revenue to the pension fund for this fiscal year, according to chief financial officer Larry Mancini, which includes expected payment-in-lieu-of-taxes (PILOT) aid from the state that will arrive in July.
The state gives Providence the PILOT aid because of the large number of institutions in the city that are exempt from paying property taxes, such as colleges and hospitals. The city uses the money to make part of its required pension payment for the prior year, which ends June 30.
That practice is risky, Moody’s noted, since it relies on the state continuing to provide the aid.
“The city’s reliance on PILOT revenue for pension funding has thus far been successful, but does carry risk,” the report said. “The state delayed PILOT payments to Providence in fiscal 2020 as it grappled with its own budget challenges. In response, the city delayed its pension contribution until the state caught up with its payment, but the delay did not ultimately affect the contribution amount.”
The rating agency also projects the city will have to start paying about $140 million per year into the pension fund by 2030, even if the fund’s investment income hits its 7% targeted rate of return during that time.
In his first term, Elorza sought to sell or lease the city’s water supply in order to shore up the fund, an idea he abandoned amid a lack of support from state lawmakers. After securing the pension changes from police earlier this year, his administration said the goal is to get similar concessions from the other unions that represent city employees and firefighters when their contracts expire.