Decisions made more than 30 years ago drive challenges. The seeds of the City’s pension problems were sown more than three decades ago when the City promised unsustainable benefit increases to members of the retirement system without funding the associated annual Actuarily Determined Contribution (ADC).2
The severity of the situation makes Providence an outlier. The City of Providence’s Employee Retirement System (ERS) is among the lowest funded pension plans in the nation. Since 1991, the City’s unfunded pension liability increased by more than $1 billion. In addition to the pension liabilities, and over and above the pension shortfall, the City’s retiree health benefits are underfunded by approximately $1.1 billion.3 The unfunded liability of the ERS drives costs to City that outpace revenue growth, limiting investments in other priorities. As of June 30, 2020, the ERS was only 22.2 percent funded.4 Total pension liabilities equated to $8,518 per resident – of which $6,629 is not funded.5 In the last twenty years, the City’s unfunded liability per capita increased by $4,000 per resident.
A coalition of civic leaders is recommending that Providence issue a $500 million bond to address the city’s massive unfunded pension obligation.
“Doing nothing is simply not an option,” the Pension Working Group wrote in a 27-page report issued Monday. The group of public officials, working with business and nonprofit leaders, released its recommendations after six months spent studying the city’s staggering pension liability problem.
Providence’s pension plan is funded at 22%, making it one of the weakest employee retirement systems in the nation. Since 1991, the city’s unfunded liability has grown by more than $1 billion, and that doesn’t include a $1.1 billion shortfall in retiree health benefits.
“Current and future retiree liabilities are unsustainable,” the report states.
Providence’s pension crisis has its roots in the late 1980s. That’s when the city’s Retirement Board approved unusually generous compounded cost of living adjustments for more than 2,500 city workers and retirees. Decades later, that move helps explain why there’s a $1.2 billion gap between the pension balance and the amount owed to current and future retirees.
The pension crisis has defied attempted solutions for years. Providence officials say the city has just 22% of the money needed to meet its long-term pension obligations. And the amount of the city budget consumed by the pension is growing 5 percent a year, to about $93 million currently. Without a change, that annual payment will rise to $227 million by 2040.
Mayor Jorge Elorza said these pension costs are unsustainable.
“It’s only a matter of time before they continue to squeeze everything else out of our budget, so that we’re cutting deeper and deeper into the bone,” he said during a recent news conference.
Elorza’s plan involves selling $704 million in pension obligation bonds. The idea is that these bonds could generate enough of a return to boost the pension system’s funding to more than 60 percent.
Governor Dan McKee on Tuesday weighed in on two critical issues facing Providence: shakeups in contract negotiations with the teachers union and Mayor Jorge Elorza’s plan for a pension obligation bond to throw the city a financial lifeline.
On Elorza’s idea for a $704-million pension obligation bond to address the city’s unfunded pension liability, McKee raised skepticism, suggesting the plan is risky and that the timing isn’t right.
“I think it’s rolling the dice,” he said. “And again, I’ll reflect back to the time I was a mayor. I made sure that there was actuaries that supported any decision made in our local pensions including the police pension. I haven’t seen any actuaries that I would rely on. I’m not sure there’s time right now between now and the end of session to do that in a way that I would feel comfortable with.”
Red flags waved as Providence Mayor Jorge Elorza proposed issuing $704 million in pension obligation bonds to deal with a pestering unfunded liability problem in Rhode Island’s capital city.
The amount exceeds the city’s annual operating budget. Bond markets often frown on such borrowing and sentiment among state officials who must sign off is uncertain. Skeptics also call the city’s fiscal management track record shaky, while memories linger of a fiasco in Woonsocket, which tried a similar move nearly 20 years ago.