Providence plans to borrow up to $515 million for the pension fund

Providence residents will soon decide whether they want the city to borrow up to $515 million for its retirement system, which is one of the least funded public retirement plans among major U.S. cities.

Providence City Council voted Thursday night to call a June 7 special election to ask the question. The Rhode Island General Assembly must also approve, given the size of the debt. State lawmakers are currently considering legislation to authorize Providence to issue the bonds.

The city’s pension task force said in January that the system’s $1.265 billion unfunded liability is the most significant impediment to sustainable economic competitiveness and affordability, and a significant threat to the state fiscal sustainability.

The employee pension system was only 22.2% funded as of June 30, 2020, according to the group. Total pension plan liabilities equal $8,518 per resident, of which $6,629 is unfunded. The latest actuarial valuation found the funded ratio to be nearly 24%, the mayor’s office said Friday.

David Draine of The Pew Charitable Trusts said the aim was to be 100% funded, but the average of the municipal plans he researched was 68%. At less than a quarter funded, that’s going to make things difficult for Providence for several years to come, added Draine, principal investigator and methodologist for Pew’s research on public sector pension systems.

State and local pension plans posted “outstanding returns” in 2021 that helped their balance sheets, but Providence didn’t have the assets on hand to take full advantage of that growth, Draine said Friday.

“It is very rare that pension promises are not actually paid,” he said. “In situations like this, it can instead crowd out major public investments, whether it’s fixing roads or putting teachers in the classroom or the range of things that cities and States are responsible for doing. With pension costs taking a greater share of public resources, you are able to do less of the things that directly benefit people today.

By fiscal year 2027, the city could use nearly 21% of its general revenue to contribute to the plan, according to the pension task force.

Providence’s unfunded pension liability has grown by more than $1 billion since 1991, largely because the city promised ‘unsustainable benefit increases’ to members of the pension system more than 30 years ago. without funding the associated annual contribution, the pensions task force said. The system covers nearly 7,000 employees and retirees.

The pension group also said current retiree liabilities are unsustainable, but bankruptcy is not an option. Central Falls, the state’s smallest city, became the first in Rhode Island to declare municipal bankruptcy in 2011. The city emerged from bankruptcy after retiree pensions were cut, some by more than 50 percent .

Leaders from the Rhode Island Public Expenditure Council, the Greater Providence Chamber of Commerce and the Providence Foundation led the retreat group. Democratic Mayor Jorge Elorza attended. Elorza called the unfunded pension liability a “ticking time bomb.”

The group recommended seeking permission for a pension bond bond if market conditions are favorable and pursuing pension bond reform through collective bargaining.

U.S. Secretary of Commerce Gina Raimondo led an overhaul of Rhode Island’s retirement system to deal with growing pension liabilities when she was state treasurer.

The results of the June 7 vote are not binding. The city would not borrow the money if interest rates were deemed too high.

Dolores W. Simon