As the long-term economic effects of the pandemic are felt, the Providence pension fund crisis is entering its final act. Providence owes its pensioners more than a billion dollars more than it has saved. It is a complicated issue; however, our biggest failures in public policy occur when challenges and opportunities are complex and can’t be easily summarized. When that happens, we tend to ignore them. Like the pandemic, ignoring this pension crisis has only made it worse.
Now a R.I. Supreme Court ruling issued on June 30 makes the situation more desperate for Providence. It means the city might have to pay seven years of cost-of-living adjustments to a group of retirees who fought a 2012 pension reform.
Prior to the crisis, General Treasurer Seth Magaziner said that the Providence pension fund is Rhode Island’s “biggest financial challenge.” Recently, there was just $265 million in the fund – less than three years’ worth of payouts to retirees. If Providence was a private company, federal law would require the city to account for its pension promises as debt, discounted at a corporate bond yield. AA corporate bonds trade at less than 3%. But Providence discounts its pension debt at 8% (the state at 7%). The higher rate reduces the projected amount of the obligation and helps determine the actuarially recommended contribution to the fund. Using this bigger number allows us to pretend the debt is smaller than it really is. The shortfall is much larger than stated, and our contribution is less significant than it appears (this year that actuarially recommended contribution is $90 million).
On the revenue side, the picture is just as bleak. General revenue for the city comes from a variety of sources. During the financial crisis in 2008, the state of California had to rewrite its budget three times because the revenue collected dropped so precipitously. Now with unemployment reaching record highs, the revenue propping up the outflow of cash is under immediate threat. We won’t collect the revenue we expect, so contingency plans need to be made now.
I first began to study the pension crisis when then-Mayor Angel Taveras appointed me to the Board of Investment Commissioners. My goal in running for office was to get ahead of the demands of the city’s pension fund before an inevitable economic slowdown. During the campaign, there were many indications a downturn was coming. At the time we were enjoying the longest economic expansion in U.S. history. No one could have foreseen it ending this way, but markets don’t go up forever. Responsible governance requires forethought, planning for adversity and tackling complicated issues. It is our most vulnerable who suffer first and worst when municipal budgets move to austerity.
This is a problem that social distancing does not help. Like the pandemic, we all suffer when collective action isn’t taken. Look no further than Gov. Gina M. Raimondo’s quick and sure reaction to COVID-19 and how leaders and front-line workers from across Rhode Island have responded. We have not avoided tragedy, but quick and proportionate action along with sound leadership and dedication of many individuals and institutions statewide has significantly blunted the deadlier courses this pandemic may have taken in Rhode Island.
We can solve this problem. Mayor Jorge O. Elorza repeatedly addressed the pension fund during his campaign, but it can’t be solved alone. Providence needs coordinated help from the city’s delegation of state representatives, from the City Council and from state leaders. Rhode Island cannot thrive without a solvent Providence. The potential solutions are complex, but we can start by:
• Lowering the expected rate of return to 7% immediately so we can work with clearer numbers.
• Create state incentives for Providence to join the state municipal employee retirement system.
• Direct some federal pandemic relief to municipal pensions while requiring a change in how they are accounted for.
Rhode Island is an incredible state of diverse and creative perspectives, and Providence is its heart. We have led in our response to this public health crisis. We can and must lead in our response to the economic fallout. n
Mark Tracy is a former Providence resident who ran for District 4 state representative in 2018. He now lives in Barrington. He formerly served on the Providence Board of Investment Commissioners.
Correction: An earlier version of this posting gave an incorrect place of residence for Mark Tracy.
