PROVIDENCE, R.I. (WPRI) — Providence Mayor Jorge Elorza and other elected leaders put forward an audacious plan Thursday to shore up the city’s woefully underfunded pension system, proposing to borrow $704 million from investors to bolster its assets.
State lawmakers would have to authorize the city to take on the proposed debt, known as a pension obligation bond. Such transactions have a checkered history in Rhode Island; Woonsocket borrowed $90 million for its pension fund in 2002, only to mismanage how the money was invested.
Yet Providence officials argue the capital city has few options left to deal with decades of unfunded pension promises that were made without putting money aside to pay them. And they say the timing is auspicious because interest rates remain low, allowing the city to borrow at around 4% and earn more than that in the financial markets.
“Doing nothing is not an option,” Elorza said during a briefing. “At the current moment the pension payments are projected to continue to grow year after year in a way that’s unsustainable for the city. It’s only a matter of time before they continue to squeeze everything else out of our budget so that we’re cutting deeper and deeper into the bone.”
There is widespread agreement about the severity of the city’s financial problem, even if there is less consensus about the solution.
Providence’s pension system was only 23.9% funded as of June 30, according to the most recent valuation by its actuary, The Segal Group Inc. At the time the city had only $380 million in assets amassed to cover $1.6 billion in benefits — a yawning shortfall of $1.2 billion.
There were 3,255 retirees or beneficiaries collecting pension benefits from Providence as of 2019, plus 3,017 active workers contributing to the pension fund who will be owed benefits in the future, according to the valuation. The city pension fund paid out $103 million in benefits in 2019; the average Providence pensioner was a 71-year-old receiving $2,445 a month.
The issue has come to a head before, most notably under Elorza’s predecessor as mayor, Angel Taveras. Warning that the city was on the verge of bankruptcy, Taveras obtained concessions from unions and retirees that he hoped would stabilize the system.
Yet despite those efforts — and the fact that the city has made 100% of its required contribution to the pension fund each of the last 10 fiscal years — the situation remains grim. Taxpayers’ annual contribution to the pension fund has nearly doubled from $49 million in 2012 to $90 million this year, and is on track to top $200 million by 2038.
Providence leaders’ options have also been increasingly restricted by the courts.
Under the terms of a 2012 judicial consent decree signed by Taveras, the city must get the pension system to 60% funded by the year 2033. And a ruling last year by the R.I. Supreme Court sharply limited the city’s ability to reduce benefits without retiree buy-in.
“Getting to 2033 is critical because that’s the commitment we’re bound by given the 2012 consent decree,” Elorza said.
So how would the pension obligation bond work?
City officials are proposing to borrow $704 million by floating a taxable bond on the capital markets. The debt would be repayable over 25 years at a fixed interest rate, projected to be around 4%. At least a portion of the debt could be refinanced or repaid after 10 years, officials told reporters during Thursday’s briefing.
The $704 million in proceeds would be added to the pension system’s assets, instantly boosting its funded ratio from 24% to 65%, according to Larry Mancini, the city’s finance director. The goal would be to invest the money in ways that would earn a strong return even after payments to the bondholders are subtracted.
In the short term, the city budget would also get some relief from fast-escalating pension payments.
In the 2021-22 fiscal year that begins July 1, for example, Providence taxpayers are currently on the hook to deposit $93.6 million into the pension fund. Of that amount, $13 million covers future pension benefits for current employees and over $80 million is for past pension promises that weren’t funded at the time.
According to the city’s estimate, if the pension obligation bond is approved, that amount would shrink from $93.6 million to $84 million — broken down as $13 million for current employees’ future pension benefits; $30 million for payments on the pension bond; and $41 million for past unfunded pension promises that aren’t covered by the bond.
The mayor said the annual budget savings would grow from about $10 million in that first year to nearly $14 million in the second year, $17.7 million in the third year and $21.5 million in the fourth year.
“I view it as we’re doing it for the financial health of the city of Providence and the taxpayers, because ultimately they’re the ones who are truly footing the bill,” said Providence City Council President John Igliozzi. “They’re paying this escalating — for lack of a better term — horrific bad mortgage.”
Igliozzi emphasized the urgency of the proposal, arguing the math only works due to the current environment of low interest rates. That will put pressure on General Assembly leaders to make a decision on whether to authorize the $704 million in borrowing sometime in the next five or six weeks, before the end of their annual session.
“We have to move fast,” said state Senate Majority Whip Maryellen Goodwin, D-Providence, who joined Elorza at the briefing to show her support for the idea.
“I think it’s a perfect time right now,” added state Rep. Scott Slater, D-Providence.
So far, state officials have been noncommittal.
A spokesperson for Gov. Dan McKee said he had not been briefed on the pension bond idea as of midday Thursday. House Speaker Joe Shekarchi’s office said Elorza floated the idea to him while the two were in line last week waiting to meet Vice President Kamala Harris, but he has not yet been briefed in detail.
Elorza — a Democrat whose second and final term ends next year — said he hoped retirees and union leaders would see the pension obligation bond as a good-faith effort by the city, potentially convincing them to offer their own concessions.
“If we’re going to be taking this step then they need to be part of the solution, too,” he said.
Ted Nesi (firstname.lastname@example.org) is a Target 12 investigative reporter and 12 News politics/business editor. He co-hosts Newsmakers and writes Nesi’s Notes on Saturdays. Connect with him on Twitter, Facebook, LinkedIn and Instagram