$515-million Providence pension bailout wins RI House approval

PROVIDENCE — The proposed $515-million Providence pension bailout has cleared its first major legislative hurdle.

The Rhode Island House voted 56-9 for the latest effort by city officials to borrow enough money to pay off the potentially crippling tab for decades of pension giveaways by past city leaders.

The legislation now goes to the Senate for a vote.

On Tuesday, city voters will get their say. Many have already received mailers opposing the proposed pension obligation bond from city- and state-level Republicans.

But city unions have been busy in their own attempts to drum up voter support for the largest borrowing in city history – with mailers, palm cards, the hiring of a teams of field organizers and Walgreens "gift certificates to distribute as raffles at high rises," according to a filing by their jointly financed "Committee to Save Providence."

Asked how the gift cards were used, Serena Conley, treasurer of The Committee to Save Providence, said: "The gift cards were raffled off at elderly high-rise buildings during presentations on the bond referendum."

Legislative Republicans, warning of the potential for a "historically low" turnout, tried and failed during Wednesday's State House debate to convince colleagues to move the June 7 citywide vote on the bond to Election Day in November.

They also tried and failed to cap the interest rate on the bonds at 4.5%, as state General Treasurer Seth Magaziner recommended. They called the proposed bond both "reckless" and "risky," and raised the specter of another "38 Studios" that could ensnare the state if a stock market turn leaves the city unable to pay the huge new debt.

But one Providence legislator after another described the proposed bond sale as the city's "only option."

Rather than viewing the borrowing as a bailout, Providence Rep. David Morales said it reflects the thoughtful approach of current city leaders to address missteps of the past.

"I know the critique on this bill is that there is not some grand pension bargain with the city's unions. OK, It's not there,'' Rep. Jason Knight of Barrington acknowledged.

"But I think more importantly ... the City of Providence gets it in a way they didn't get it 20 or 30 years ago," he said.

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City unions contributing $25,000 each to the marketing campaign for the bond include Providence Firefighters Local 799, the Providence FOP Lodge 3 and the New England regional affiliate of the Laborers International Union of North America.

From the Providence GOP, and the state GOP's Republican National Committeeman Steven Frias, city voters and lawmakers heard these warnings:

“If Providence voters approve the $515-million pension obligation bond next week, they will likely end up destroying their city financially.

"When the City of Woonsocket tried a pension obligation bond ... t led to a financial nightmare and a 23% property tax increase in a single year.

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"Providence’s bond lacks even the minimal safeguards recommended by the General Treasurer such as a 4.5% cap on the bond’s interest rate."

"These unions would rather have the taxpayers risk a financial calamity than accept any further changes to their pension plans, such as bringing their pensions into line with the state pension plan."

But from the bond boosters, most notably Mayor Jorge Elorza, they hear: the city's pension debts are growing by 5% a year while its revenues are growing by only 2%. And without a massive paydown of the pension debt, the city is headed for crisis.

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Conversely, taking out the equivalent of a mortgage to pay off the city's pension debts will free up tens of millions of dollars for essential city services and schools and prop up a pension system that is currently one of the worst-funded in the nation.

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Along the way, Magaziner penned a letter to lawmakers in which he urged the city to bring its pension benefit structure in line with that of the state.

"This will improve financial sustainability and reduce risk over the long run, while providing a fair and uniform landscape for public employees across the state," he said.

Magaziner also urged the lawmakers to put guardrails in place, such as capping the true interest rate at 4.5%, limiting the term to 25 years and requiring that no more than $150 million of the bond be issued in any six-month period. He also recommended a call option so that the city may refinance the bond at a lower interest rate if possible.

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The reworked bill includes some but not all of his recommendations: the call option and the maximum 25-year term. However, it stipulates a rate cap higher than Magaziner recommended, 4.9%.

According to House spokesman Larry Berman, the latest version also tightens language "on the safeguard against the city increasing benefits in the future," and requires the city to put $10 million into a trust fund for other post-employment benefits.

Asked if Magaziner would vote for the bond, his spokesman Ben Smith said:

"The Treasurer appreciates that several of his recommendations to decrease the risk of the pension obligation bond proposal were included in the final version of the legislation and is disappointed that others were not incorporated.

"As a Providence voter, Treasurer Magaziner plans to vote in favor of the proposal, with some reservations, and will make his office available to assist the city with implementation of the proposal if it should be approved."

Regardless how the votes go in the city and the State House, the city is scheduled on  Jan. 1 to resume 3% compounded annual cost-of-living increases for many of its 3,250-plus retirees, a practice suspended for a decade after Angel Taveras took office as mayor and declared a "Category 5" financial hurricane.

Some retirees will get less. But about three dozen retirees from the city's police and fire ranks who opted out of a settlement will get 5% or 6% compounded COLAs, according to city spokeswoman Theresa Agonia.

The net result? 

The required city contribution will jump by 7.1%, from $93,585,059 this year to a projected $100,323,373 next year. The surge reflects the resumption of COLAs, according to information provided by the city. 

By way of comparison: state employees, teachers and many other municipal employees get pension increases once every four years. The last was 1.06%, and that only applied to a portion of their benefit.

They will not see the return of annual COLAs until the state pension system is 80% funded, which is not expected to happen until 2030 at the earliest, according to the state treasurer's office.

This article originally appeared on The Providence Journal: Providence pension obligation bond gets vote in RI House