PROVIDENCE — Mayor Jorge Elorza’s administration is planning to ask state lawmakers to allow the city to borrow hundreds of millions of dollars through a pension obligation bond.
Under the proposal, Providence would borrow $704 million at an interest rate of approximately 4 percent, and pay it back over 25 years. The plan would not require voter approval, according to the mayor.
The administration would be asking lawmakers to exempt the city from a state law that prohibits municipalities from incurring debt of more than 3 percent of the full assessed value of all taxable property in the city, said Larry Mancini, Providence’s chief financial officer. That would allow the city to continue to borrow for more common purposes, like infrastructure improvements.
“Doing nothing is not an option,” Elorza said Wednesday.
Elorza said the city is seeking to take advantage of low interest rates while still following through on all the terms of a 2013 pension settlement with the city’s public employee unions and most retirees.
The state Supreme Court ruled last year that if a pension plan for city employees and retirees is changed by the courts, it can’t be changed again by the City Council — unless the workers agree to the changes. Elorza said that decision makes it nearly impossible to seek more changes to retiree benefits.
Elorza said he has already briefed some legislative leaders and members of the City Council on the plan, which would involve borrowing enough money to bring the pension system from its current 22 percent funded level to above 60 percent funded.
House spokesman Larry Berman said Speaker Joseph Shekarchi has not yet been briefed on the plan, and legislation has not been introduced. Berman said that Elorza mentioned the idea to Shekarchi while the two were in line to meet Vice President Kamala Harris last week.
Providence’s pension system has an unfunded liability of $1.26 billion. The city is scheduled to contribute $90 million to the pension fund in the current fiscal year, a number that’s projected to rise to $123 million a year by 2030.
If a bond is approved, Mancini said, the city’s annual payment is likely to be closer to $110 million in 2030, and the pension system would be more than 75 percent funded.
Council President John Igliozzi, who has long advocated for Providence to consider a pension obligation bond, said current market conditions make the proposal too good to pass up.
“This proposal would not be financially responsible or viable a year ago or a year from now,” Igliozzi said. “It’s only financially possible today because of the present market conditions. We have a small window. This is a moment in time to address a serious long-term financial issue for the city.”
A bond, Igliozzi said, would allow the city to make predictable, affordable payments to the pension system over time. The pension fund had $381 million as of April 16, so a $700 million infusion would give the city more than $1 billion to invest.
Pension funds come from employer and employee contributions, along with investment returns. In any given year, the city pays out $85 million to $90 million in pension benefits to more than 3,100 retirees.
Elorza, a second-term Democrat who is likely the to run for governor next year, has tried to address the pension system in the past, including floating a controversial plan to lease the city’s water system to the Narragansett Bay Commission in exchange for a large payment to the pension system. But the plan faced widespread opposition, and Elorza backed off in 2019.
Pension obligation bonds are often seen as a gamble because they have to be paid back no matter how well or poorly the investment market performs, but Igliozzi said the possibility of an interest rate at or below 4 percent should mitigate the risk.