You’ve probably heard by now that Providence Mayor Jorge Elorza wants to borrow $704 million for its pension system, and is planning to have legislation introduced at the State House as soon as today.
Here’s a look at where things stand with Providence’s pension fund and what Elorza is attempting to do with his latest big idea.
As of June 30, 2020, Providence projected that it had about 22 percent of the money it needs to pay current and future retirees (police, firefighters, employees at the Department of Public Works) over the next several decades, and the gap to become 100 percent funded is $1.2 billion.
That money will never come due in a single year, but the city pays out $85 million to $90 million to more than 3,000 retirees each year, and its annual payment to pension system is projected to grow from $90 million in the current fiscal year to $136 million by 2033. With only around $350 million saved up, the fear is that an extended downturn in the economy could put the city on the brink of bankruptcy.
The potential consequences
When you hear Elorza say “doing nothing is not an option,” he means there will come a time where Providence won’t be able to make those ever-increasing annual payments to the pension system without drastic cuts to other areas in the city budget – like trash pickup or libraries – or massive tax increases. That’s not currently the case and there’s no exact timeline when a crisis will emerge, but it’s an anchor around the city’s neck.
Solutions are complicated
With every discussion about pensions, there’s always the belief that simply forcing employees to contribute more to the pension system or switching to a 401(k) program or slashing the benefits of existing retirees is the answer. Those options may sound like solutions, but you could close the pension system right now and the city would still owe hundreds of millions of dollars to retirees. And there’s a state Supreme Court ruling on the books that it makes it very difficult – Elorza would say nearly impossible – to alter retiree benefits unless the city files for bankruptcy.
Elorza’s latest idea
You might remember a few years ago when Mayor Elorza wanted to lease the city’s water supply in order the generate a windfall of cash for the pension system. That plan was rolled out poorly and had very little public support, so Elorza ditched it. If he wanted, Elorza could never talk about pensions again and the city would not falter in the final year-and-a-half that he has in office.
Instead, the mayor has come up with a plan to borrow $704 million and dump the money into the pension system. He says that would immediately bring the city’s pension funding level to 65 percent, which is obviously better than 22 percent. It’s a risky proposition: If it works, the pension fund would suddenly have $1 billion, the city would post healthy investment returns of more than 7 percent a year, and the city could easily pay back the bond over 25 years. But the plan relies on good investment strategies and a lot of luck. If, for example, the market went in the tank right after the city borrowed the $704 million, catching up would be painful.
The timing is tough
The mayor’s plan would need legislative approval, and folks at the State House are still scratching their heads over the timing of the plan. When the city rolled out its legislative agenda earlier this year, a pension bond was nowhere to be found. In fact, the biggest headline from the city’s requests was a strange idea to legalize the use of ATVs and dirt bikes on city streets. Now the city is seeking to cash in all of its political chips on an idea that already failed in Woonsocket but has had some success in other communities around the country.
One saving grace
It’s no secret that Elorza wants to run for governor next year, and it would be very easy for potential opponents like Governor Dan McKee and Treasurer Seth Magaziner to kill the pension bond plan right away. But the city is lining up labor support – police officers and firefighters love the idea of a better-funded pension system – and that goes a long way at the State House. Then again, not reaching out to McKee and Magaziner before the plan became public may have been a misstep.