PROVIDENCE – The city of Providence is asking the state to let it borrow up to $704 million to aid its beleaguered pension fund, Mayor Jorge O. Elorza announced in a virtual press conference on Thursday.
The 25-year, fixed interest-rate pension obligation bond requires legislation to bypass state laws that limit the amount of debt municipalities can take on relative to their assessed property value.
Elorza touted the bond as a solution to the city’s long underfunded and “unsustainable” pension fund with growing annual payments.
“It’s only a matter of time before they squeeze everything else out of the budget,” Elorza said of the pension payments.
The city’s pension fund is only about 22% funded and faces a $1.2 billion unfunded liability – a $200 million increase after the city Board of Investment Commissioners recently voted to lower its rate of return from 8% to 7%. A state Supreme Court ruling in 2020 also means the city will likely have to pay out up to seven years of 6%-per-year cost-of-living increases to a group of retirees who opted out of a prior settlement agreement. At the time, Elorza said the court decision would create “ballooning pension payments” for the city, but did not say how it would pay for them.
The court decision also prevents the city from renegotiating terms of pension plans with retirees when it has already locked them through a consent agreement.
Borrowing money would bring the pension fund up to 65% funding the day the bond closes, reaching 78% by 2033, according to city projections based on the current rate of return. It would also decrease the city’s annual pension payments, beginning by shaving off $10 million from its fiscal 2022 payment.
The pension fund balance was $381 million as of April.
Council President John J. Igliozzi likened the city’s pension obligation to a “horrific mortgage,” saying the plan will benefit taxpayers who continue to foot the bill for increasing pension payments that raise the overall bottom line of the city’s spending plan.
The approved fiscal 2021 budget includes about $86.7 million toward the pension fund, with a proposed $93.6 million in the fiscal 2022 budget Elorza unveiled in April – the 10th year in a row the city would make the full contribution, according to Chief Finance Officer Lawrence Mancini. By 2040, the annual payment is expected to hit $227 million, Mancini said.
Historically low interest rates, combined with support from city council members, municipal unions, state lawmakers and a positive recommendation form the city’s financial advisors make this an opportune time to borrow, Elorza said. The city is looking to borrow at about a 4% interest rate, based on the recommendation from its financial advisors.
Mancini sought to dispel fears around pension obligation bonds, which can be controversial and have not always worked as intended, including a failed $90 million pension bond approved by voters in Woonsocket in 2002. After a stock market crash and poor investment decisions, Woonsocket still faced a $201 million unfunded liability plus debt repayment in fiscal 2019, according to a Fitch Ratings report in September.
New requirements around pension obligation bonds prevent those problems from happening now, Mancini said, adding that “several cities” across the country have seen success following the same approach.
Democratic Providence lawmakers, Sen. Maryellen Goodwin and Rep. Scott Slater, each expressed support for the proposal and said they intend to introduce legislation on the city’s behalf, potentially as soon as Friday.
Nancy Lavin is a PBN staff writer. You may reach her at Lavin@PBN.com
