Providence executives will seek agreement to borrow $500 million for the pension fund

PROVIDENCE, RI (WPRI) – Providence Mayor Jorge Elorza will once again ask state lawmakers to approve hundreds of millions of dollars in borrowing to save the city’s ailing pension fund, but this time with a lower price and a plan to ask the town’s voters for their approval.

The proposal, backed by both Elorza and City Council Speaker John Igliozzi, calls for a $500 million pension bond to help shore up the massively underfunded retirement system. Elorza previously asked lawmakers to approve a bond totaling more than $700 million.

The new plan, approved by the Providence Pension Working Group on Monday, also differs from the original because it would ask city voters to approve the loan. Elorza said the city may hold a special referendum election soon — rather than waiting until November.

“We need to strategize on when we would hold the referendum,” Elorza told reporters on a Zoom call. He did not rule out going to voters for approval before approval by the General Assembly.

Elorza said new legislation would likely be presented to the General Assembly next week by members of the Providence delegation. Last year’s version of the bill was introduced late in the session and did not get a vote.

The task force’s 21-page report offers a stark assessment of Providence’s retirement woes, warning that the city has one of the “underfunded pension plans in the nation.” The city’s pension commitments total $8,518 per resident, of which $6,629 is unfunded.

“At the end of the day, if Providence can’t maintain stability, it impacts the entire state,” Igliozzi said.

City leaders believe the pension bond requirement makes sense now because of low interest rates, betting that the return on investment in the pension fund will exceed interest payments on the debt. The city currently assumes a 7% rate of return for the pension.

The new proposal assumes that the 25-year fixed rate bond will have an interest rate no higher than 4.39%, and likely lower given the current climate.

The pension fund currently has $396 million, with unfunded liabilities of $1.2 billion, the result of decades-old agreements that provided retirees with generous annual increases without the corresponding funds being deposited into the pension fund. This gives the system a funding level of only 22%.

The city now pays its total contribution determined by an actuarial calculation, or ADC, to the pension fund each year. This year, the payout is $93 million, but it’s expected to reach $120 million by 2026, which would represent more than 20% of the city’s budget.

Elorza said the annual payment is expected to increase by 5% per year, faster than city revenues can keep up, meaning it will ultimately be difficult to fund other areas of the city budget due to the pension payment.

He said the $500 million bond would allow the city’s annual pension payment to grow at a rate of 2%, the same rate the city’s revenues are expected to grow.

The pensions task force considered several other options, according to a report released on Monday, including bankruptcy or renegotiation with pensioners.

But the group said bankruptcy is not an option for a city that can currently pay its bills. And while bargaining with retirees is possible, a recent RI Supreme Court ruling overturned previous pension reform efforts, making it unlikely the city could win concessions from this group, the report said.

Elorza had previously offered to sell or lease the city’s water supply, but the idea never gained widespread support. The monetization of water supply would also have required the approval of the General Assembly.

“There really aren’t any options available to us at scale that will help us meet the challenge we face,” Elorza said. “We are working with very limited options.”

He said bankruptcy would not be an option “for a very long time”.

“And the pain that would be necessary before going bankrupt would be enormous, so much so that we all want to avoid it,” Elorza said.

The group also considered borrowing the larger amount of $700 million or a lower amount, such as $300 million. The report said the $700 million would bring the pension fund out of “critical condition” sooner, but would be most dependent on market timing due to the massive injection of cash in one go. The $300 million amount would take longer to bring the fund out of critical condition and would not allow the annual pension payment to decrease as much.

The task force report also warned that the billion-dollar hole in the pension system isn’t Providence’s only financial concern related to retirees, pointing out that the city has a separate unfunded liability for benefits. retiree health benefits estimated at around $1.1 billion – putting the combined unfunded liability for both sets of benefits at well over $2 billion.

The report says city officials should also take steps to start saving money to cover retiree health benefits and look for ways to reduce medical costs, as part of its financial stability efforts.

Members of the task force included Elorza, Providence Foundation Executive Director Cliff Wood, Greater Providence Chamber of Commerce President Laurie White, Rhode Island Board of Public Expenditure Chairman Michael DiBiase, Rico Vota (appointed by Governor Dan McKee), State Rep. Camille Vella-Wilkinson (designated for Speaker of the House Joe Shekarchi), Senate Tax Advisor Steve Whitney (designated for Senate Speaker Dominick Ruggerio), City Councilmen Pedro Espinal and Helen Anthony, financial advisers Mackey McCleary and Kristin Fraser, and State Senator Sam Zurier.

Elorza stressed that the participation of representatives of the governor and legislative leaders in crafting the $500 million bond proposal is not an endorsement of the idea on their part.

“It is premature for them to comment until a bill is introduced,” said Larry Berman and Greg Pare, spokespersons for Shekarchi and Ruggerio. “Once it is, the legislation will go through the normal public hearing process in the respective House and Senate Finance Committees.”

McKee spokesman Matt Sheaff also said the governor’s appointee to the panel was “strictly an observer and did not participate in the writing of the report.” He said the governor is reviewing the report.

DiBiase acknowledged that RIPEC, a business-backed think tank, continues to worry about the potential downsides of a mandatory pension obligation, but said that was outweighed by concerns about long-term financial stability. of Providence. “From my perspective, it’s worth the risk,” DiBiase said.

Steph Machado ([email protected]) is a Target 12 investigative reporter covering Providence, politics and more for 12 News. Connect with her on Twitter and on Facebook.

Dolores W. Simon