Municipal finance expert calls borrowing to fill Providence pension hole a ‘riverboat gamble’


Tuesday 01 February 2022

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Providence City Hall PHOTO: GoLocal

On Monday, Providence Mayor Jorge Elorza announced the release of a report by the Providence Pensions Task Force recommending that the state pass legislation allowing the Elorza administration to go from before with borrowing $500 million to make payments to meet the unfunded pension obligation.

Providence currently has one of the least funded pension plans in the country. The Task Force report indicates that over the past twenty years, the City’s unfunded liability has increased by almost $810 million.

But local and national municipal financial officers warn of the dangers of this form of financing.


“Pension obligations carry significant risk, which is why the Government Finance Officers Association recommends that state and local governments exercise caution before authorizing them,” said Gary Sasse, former head of the Rhode Island Public Expenditure Council. and founding director of the Hassenfeld Institute at Bryant University.

“I understand that Providence Pension Bond Bonds [POBs] are proposed because the City does not have a politically viable option. That doesn’t make it less than a river bet,” Sasse added.

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The Government Finance Officers Association has issued an alert

Even more critical are the guidance from the Government Finance Officers Association (GFOA), which issued an alert recommending that state and local governments not issue POBs for the following reasons:

– The POB proceeds invested may yield no more than the interest rate due over the term of the bonds, resulting in an increase in overall government liabilities.

– POBs are complex instruments that carry considerable risks. POB structures may incorporate the use of collateralized investment contracts, swaps or derivatives, which should be carefully considered as such embedded products may introduce counterparty risk, credit risk and interest rate risk. ‘interest.

– Issuing taxable debt to fund pension plan liabilities increases the jurisdiction’s bond debt burden and potentially depletes debt capacity that could be used for other purposes.

– In addition, taxable debt is typically issued without call options or with “offset” call options, which can make repayment or restructuring more difficult and costly than traditional tax-exempt debt.

– POBs are often structured to defer principal payments or extend repayment over a period longer than the actuarial amortization period, thereby increasing overall sponsor costs.

– Rating agencies may not consider the proposed POB issuance to be credit positive, particularly if the issuance is not part of a more comprehensive plan to address pension funding shortfalls.

City Council Speaker John Igliozzi is pushing the Retirement Bond Plan.

“I appreciate the efforts of the Pension Task Force to explore options to reduce the City’s unfunded pension liability. City Council will accept his report on Wednesday at a special council meeting and hear a presentation on recommendations to help solve our retirement problems. The numbers don’t lie and the hole will only get deeper over time if we don’t act. When considering a $500 million pension bond, I would emphasize the importance of a fixed interest rate and consistent payments equal to what the city is currently paying to accelerate debt reduction. Any new strategy we explore should include placing financial governors (or guardrails) on future city councils and administrations to keep payments stable over the years,” said Igliozzi, who represents Ward 7.

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Providence Mayor Jorge Elorza wants to borrow $500 million to pay off unfunded pension obligation

According to Elorza’s press release, “The task force also found that not taking action is not an option, as it would compromise the retirement security of plan participants as well as the City’s ability to provide the City services in the future A noteworthy recommendation from the Pensions Task Force recognizes that Providence should receive legislative authority from the state and city voters to issue a pension bond bond to large enough to deposit $500 million in the ERS if favorable borrowing terms and conditions are met.

The financial firm that devised the pension bond strategy for the Elorza administration is also tied to one of the biggest controversies in modern Rhode Island history.

That same company, Dallas-based Hilltop Holdings Inc. unit Hilltop Securities Inc., agreed to pay $16 million to “settle all claims in litigation involving Rhode Island Commerce Corp.” on the infamous bankrupt video game company run by former Boston Red Sox pitcher Curt Schilling

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