Good news and bad news about Providence’s finances

New Providence Mayor Brett Smiley starts his tenure with a big rainy day fund, but an underfunded pension liability.Mark Stockwell/Associated Press

There was mixed news for Providence’s finances as former mayor Jorge Elorza left office earlier this month.

We’ll start with the good.

After eight years on the job, Elorza, a Democrat, helped the city increase its rainy day fund to $29.6 million as of June 30, 2022, according to auditors. That’s the largest it has been since at least 2002 (and likely much longer than that).

That’s especially impressive since the rainy day fund was in the red by $13.4 million in 2015, Elorza’s first year in office. The city ran an unexpected deficit that year, and then rattled off seven consecutive surpluses for the rest of Elorza’s tenure.

Before you get too excited, you aren’t getting a refund. The rainy day fund – technically known as the city’s unreserved/unassigned funds – is designed to provide a cushion to help the city navigate years when things go south, like in the 2009-2010 fiscal year when a combination of cuts in state aid and fallout from the Great Recession led to an operating deficit of close to $14 million.

Now, on to the not-so-good.

The pension liability is growing, too.

Providence’s total pension liability – the amount it projects to owe current and future retirees over many decades – hit $1.7 billion as of June 30, 2022, and the city reported holding just $402 million to cover those costs (roughly 23 percent).

Last year was a difficult investment year for just about everyone, and Providence reported nearly $40 million in pension investment losses. Remember, the pension fund is made up of contributions from the city, its employees, and the investment returns that come from those funds.

So what does this all mean for new Mayor Brett Smiley?

The city has more than enough money right now to pay its bills (including pensions for retirees), and a healthy rainy day fund definitely gives the city breathing room. The influx of federal funds since the beginning of the pandemic doesn’t hurt, either.

But the city’s annual payment to the pension fund grows every year at a rate that is faster than new revenue coming in, so Smiley knows that by the end of his first term in office, Providence could once again face a budget crunch.

The proposal to borrow $500 million for the pension fund is on hold because interest rates have increased, but the city has a five-year window to borrow if rates comes down. Smiley has floated the idea of moving the city’s pension fund into the state fund, but it’s unclear if new Treasurer James Diossa would want to throw his support behind that idea.

This story first appeared in Rhode Map, our free newsletter about Rhode Island that also contains information about local events, data about the coronavirus in the state, and more. If you’d like to receive it via e-mail Monday through Friday, you can sign up here.