After being turned down last year, Providence, Rhode Island, officials came back to the state Legislature with a reworked plan for issuing pension obligation bonds to shore up its woefully underfunded pension system.
The state Senate Finance Committee heard testimony Thursday from city officials on 2022-S 2321, a bill that would let Providence sell $500 million of POBs when market conditions permit.
The city’s pension fund is only 24% funded and faces a $1.2 billion liability. The city also has a $1.1 billion OPEB liability.
The committee voted to hold the legislation and will revisit it soon. Should they pass it, the next steps will be for the full legislature to vote on the bill and for the city to place the request up for a June 7 vote. Then the City Council must give final approval for the bond issuance, which would finance contributions toward the unfunded pension liabilities.
The city came up with a revised plan that tries to remove some of the risks while addressing the fact that its pension expenses grow about 5% a year.
Mayor Jorge Elorza told the committee the new plan “is frankly a better proposal than was put before you
The size of the bond issue was decreased and several other actions were taken to add safeguards not included in the
Providence negotiated with its main unions to make changes to their contacts, and now employees there pay more into their own pensions than any other municipal employees in the state.
Also, a public vote on the bond issue was added.
“We’re not looking for a bailout. We’re not looking for a backstop. We’re simply looking for authorization to allow the city to fix its own pension problem,” the mayor said.
The mayor said the city came up with the scaled-down amount of bonds by looking at a new revenue forecast of 2% a year — down from a previous 5% assumption — and calculated that the correct level for a POS would be $500 million to reduce the yearly cost in pension payments to 2%.
Elorza said the city was tracking market conditions closely.
“Our advisors have told us that there was a recent closing on a pension obligation bond in California for a city with a very similar risk profile and credit rating as ours,” the mayor said. “They just closed at 4.2%. While no one knows what the market is going to look like — and say we get all the approvals and we move forward — we would be ready to go out to market about 45 days after [final approval].
If issued, the POBs would have a maximum 25-year maturity.
“We’re hoping interest rates remain low, but as part of the bill there’s also a guardrail — a total interest rate cap. So if it reaches about 5%, we can’t do it,” he said.
The mayor said by just issuing pension bonds the city stood to see about $180 million in net present value savings.
In a letter sent to the General Assembly, State General Treasurer Seth Magaziner was said to have been generally supportive of the city’s request this time around, but suggested the borrowing cap be lower, at about the 4.5% level.
Last year, Magaziner opposed the bond issuance, calling the $850 million bond plan too risky for the city.
The mayor said the city could have re-amortized the pension funds, but the present value of that would be negative, with the costs being pushed out farther down the road and those costs would be higher.
Selling bonds and re-amortizing the funds, he said, as prescribed by the bill, would allow the city to make gains in fixing its pension system while helping with cash-flow problems.
Elorza said the city looked at both the pension liability and OPEB and found the fixes they needed were very different.
“The fundamental problem that gives added urgency to pensions is that our expenses grow each year by 5% and they outstrip our revenue forecasts,” he said. “OPEB is different. While the size of the liability is similar, the yearly growth in the expenses is under control.”
Over the past eight years, he said, total OPEB expenses have grown only 9%, about 1% annually.
“This is well within our capacity to pay for it year after year,” Elorza said. “The challenge with pensions is that it’s just unsustainable and it’s pushing us closer and closer to that next fiscal cliff every year that goes by.”
Elorza, who has been mayor since 2015, can’t run again due to term limits legislation.
In June 2020, Rhode Island’s
In 2013, the state Supreme Court said the city can’t renegotiate with current retirees, which make up 91% of the unfunded liability.
Because it was suggested as a fix, the mayor said, bankruptcy was looked at closely, but Chapter 9 was decided against because the city doesn't qualify — it is meeting its everyday obligations and is not insolvent.
Providence last issued bonds in 2020 when it sold $24.7 million of tax-exempt and taxable GO refunding bonds. Prior to that, it had not been in the market since 2014 when it issued $23.8 million of bonds.
The city’s general obligation bonds are rated Baa1 by Moody’s Investors Service, BBB-plus by S&P Global Ratings and A-minus by Fitch Ratings.
