‘Doing nothing is not an option’: Elorza offers $500 million retirement bond to State House
PROVIDENCE, RI (WPRI) – Providence Mayor Jorge Elorza was peppered with questions from lawmakers Tuesday night as he sought their approval to borrow more than $500 million to invest in the city’s ailing pension fund. town.
It was the second time Elorza had offered a pension bond bond, which also has the backing of city council president John Igliozzi. The two argued that the proposal had changed for the better since last year, and several previous skeptics — including state treasurer Seth Magaziner — bought into the idea.
Elorza and Igliozzi sat side by side before the House Finance Committee, urging them to consider allowing the city to borrow money. The funds would not come from the state, but General Assembly approval is required to allow Providence to borrow beyond its usual capacity under state law.
“We’re not looking for a state bailout, we’re not looking for a state guarantee, we’re not asking the state to intervene in any way,” Elorza told the panel. “Doing nothing is not an option.”
The basic idea is that the interest rate on the pension bond would be lower than the expected rate of return on the pension fund’s investments, saving money as the city strives to bring the fund out of its “critical state”. But it also depends on the vagaries of the financial markets, which carry risks by nature.
Igliozzi handed lawmakers a chart showing that since its inception in 1996, the pension fund’s rate of return has been 7.4%, higher than expected interest on debt. (The fund assumes an average annual return of 7% based on actuarial calculations.)
“If we don’t solve our problem, it will impact all of you,” Igliozzi said. “I don’t want the city of Providence to be a burden on all of you.”
The proposal has changed since last year, when the bill would have allowed the city to borrow up to $850 million. This time, following the recommendations of a working group that met over the past year, Elorza is seeking authorization to borrow $515 million.
The city also plans to poll voters on the issue in a June 7 special election, which was not part of last year’s proposal. The referendum is not binding, but city leaders say it would indicate whether Providence residents support the plan.
This year’s legislation also contains several new safeguards, including that interest on the bond cannot exceed 5%. (The city’s chief financial officer says he expects an interest rate of about 4.3% or 4.4%).
Members of the House Finance Committee asked Elorza a litany of questions, including what was being done with the unfunded parallel liability for retiree health care, whether the city was considering bankruptcy and whether Providence could borrow a smaller amount that would not put it above its borrowing limit — eliminating the need to seek General Assembly approval.
Both Elorza and Igliozzi said they were unwilling to max out the city’s existing borrowing capacity — a total of $225 million — on a pension bond because the city is also borrowing money. for infrastructure projects.
Elorza Chief Financial Officer Larry Mancini said Providence would not qualify for bankruptcy because the city is not insolvent and can currently pay its bills.
Elorza also sought to pit Providence’s plan against a retirement bond bond issued in the 2000s by the city of Woonsocket, which critics called a failure.
Providence’s plan includes an option to refinance the loan after 10 years if interest rates are lower, which Woonsocket did not have, Elorza said. He also said Woonsocket borrowed the money at 6.23% interest and had an “unrealistic” supposed rate of return above 8%.
Providence’s pension fund, with assets worth $396 million in January, is woefully underfunded.
The gap between what Providence has invested in paying its retirees’ pensions and how much the city will actually owe retirees over time is about $1.2 billion. The problem was caused over decades when several city governments promised workers retirement benefits but did not set aside enough money to fund them.
The Elorza administration has paid the full actuarially determined contribution – currently $93 million – each year. But the payment is expected to increase by an average of 5% each year, which Elorza and Igliozzi say would crowd out other city departments in the budget since revenues are only growing 2% per year.
According to Mancini, the pension fund is currently expected to reach 60% funding by 2035, when the city’s annual payout would reach $183 million. The pension obligation would see the fund 60% funded by 2026, Mancini said, with an annual payout — including debt service — of $100 million.
Leaders of three of the city’s unions also testified in support of the plan, pointing out that they had negotiated significant concessions to try to make the pension fund more sustainable in the future. But most of the unfunded debt comes from city workers who have already retired, not current union members.
Members of the Providence firefighters union have agreed to raise pension dues to 16% of salary over the next five years and pay more for their medical benefits in a new collective bargaining agreement expected to be approved by city council this month.
“When I come to you and say it’s the only option left, it really is,” said Derek Silva, president of the firefighters’ union, testifying in support of the pension requirement. “We haven’t neglected anything, we’ve mixed up all the deck chairs we could. And all that remains is to let Providence sort out its own problem.
The Providence police union also agreed to increase its pension contributions to 13.5%.
The committee received testimony opposing the plan from Steven Frias, who represents Rhode Island on the Republican National Committee. He argued that pension obligations should be avoided.
“They are high risk, highly timing dependent, and can fail miserably,” Frias wrote. He argued that the obligation could turn into a “tax fiasco” and that Providence should instead reduce pensioners’ benefits.
But several people who had previously testified against the legislation changed their tune this time around.
Magaziner – who last year opposed the proposal as a “bet” and had no clear plan to mitigate the risk – this time offered advice for lawmakers to mitigate the risk.
In a letter to the committee, Magaziner recommended lawmakers reduce the maximum interest cost from 5% to 4.5%, limit the term of the bond to 25 years, and require the bond to be borrowed or invested in smaller pieces rather than all at once.
Responding to a question from finance committee chairman Marvin Abney, Elorza said he would be willing to accept a slightly lower cap on the interest rate.
He also noted that final approval would come from the city council and that money would not be borrowed if conditions were unfavorable, even after approval by the General Assembly and voters.
What if interest rates were higher than expected?
“It’s not going to happen,” Igliozzi said. “The City Council will not allow this to happen.”
Two other former skeptics – former councilman and current state senator Sam Zurier and Michael DiBiase, head of the Rhode Island Public Expenditure Council – are also now in favor of the pension obligation.
Both men were part of the working group that studied potential alternatives and came up with the new proposal.
“This pension bond obligation, in our view, is worth the risk,” DiBiase said, citing the new safeguards.
No vote has been taken on the bill and no hearing has yet been scheduled in the Senate.