Historically favorable market conditions provide a once-in-a-generation opportunity to address unsustainable pension liabilities
May 13, 2021
PROVIDENCE, RI – Mayor Jorge O. Elorza today joined Council President John Igliozzi (Ward 7), Senate Majority Whip Maryellen Goodwin, Deputy Majority Leader Rep. Scott A. Slater, and members of the City of Providence Finance Department to announce the City’s intent to submit special legislation authorizing the City of Providence to issue a 25-year, fixed-rate, low-interest $704 million Pension Obligation Bond (POB). The City would also choose to include a 10-year par call feature on at least a portion of the Bond, providing the City the option to refinance in the future after evaluating the cost.
“For years, my administration has been managing our finances by budgeting responsibly, finding savings whenever possible, and eliminating redundancy and waste – but we cannot wait a minute longer to right decades of bad decisions and deals,” said Mayor Jorge O. Elorza. “Our residents, employees and retirees are depending on our swift action. This transaction would put us on a path to addressing our pension liabilities while freeing up tax dollars for much-needed investments that will serve our children and future residents for generations to come.”
Pension Obligation Bonds are bonds issued by a municipality from which the proceeds are used to reduce the accrued unfunded liabilities of its pension system. By issuing this Pension Obligation Bond under current conditions, the City would increase the funded level of its Employee Retirement System from 22% to 65%; change the current annual payment pattern to a more sustainable and manageable level; realize budget savings due to current favorable market conditions, and free up funding to invest in City infrastructure and service.
“Under current conditions, this pension obligation bond presents a unique opportunity for the City to ensure long-term stability for Providence taxpayers and residents,” said Council President John J. Igliozzi. “The City currently has continually escalating payments to the pension system that must be made annually in line with the actuarially determined contribution (ADC). These spiraling increases would be mitigated under the terms of a pension obligation bond, which would provide the City with predictable annual payments over a 25-year period and dramatically reduce the City’s unfunded pension liability.”
Although the City has made 100% pension payments for the last 10 fiscal years, payments have steadily risen by an average of nearly 5% per year, outpacing the growth of the City’s tax base. Mayor Elorza’s most recent proposed FY22 Budget allocated $93,585,060 to the pension fund. Despite these actions, the City’s current unfunded liability totaled $1.265 billion (22.17% funded) as of June 2020. According to the most recent actuarial report, the City’s current payment schedule is forecasted to surpass $200 million in less than 20 years and peak at $227 million in FY2040.
“The current path the City is on is unsustainable and the City must address its long-term financial situation before the pension payments grow beyond what is budgetarily possible,” said Senate Majority Whip Maryellen Goodwin. “We have a unique moment right now to work together, Mayor Elorza, City Council, and the General Assembly, to address the City’s long-term financial situation once and for all.”
The current market conditions, namely historically low-interest rates, present a unique opportunity for the City to capitalize the existing pension while reducing the overall annual contribution the City will be required to make. Principal and interest payments on the bond itself, as well as the additional contributions the City will still be required to make on the remaining 30-35%, will be significantly lower than the existing payment structure. This revised schedule of payments will grow more sustainably and remain within what is possible in the City’s budget. Additionally, any proceeds of this investment could be deposited into the pension plan, which would raise the funded level to above 65%.
“The City’s finances have been managed responsibly with an eye to the future,” said Deputy Majority Leader Representative Scott Slater. “We need to come together to ensure that Providence can continue to invest in its people. I look forward to working with Mayor Elorza and my colleagues in the Legislature so that we do not pass up this opportunity to secure the future of our capital city.”
Under Rhode Island law, the City may not acquire any debt, unless otherwise excepted by law, greater than 3% of the assessed value of taxable property without legislative approval. The City will seek authorizing legislation by the General Assembly and the Pension Obligation Bond would not be included in the City’s 3% debt limit.