PROVIDENCE, RI (WPRI) – Providence’s proposed $500 million retirement bond bond is poised for state approval, even as rising interest rates raise questions about whether and when the money can be borrowed.
The House Finance Committee on Thursday night approved an amended version of Providence Mayor Jorge Elorza’s bond proposal, sending it to the full House for a floor vote. (On the Senate side, the bill was heard in committee but no action was taken.)
Elorza’s plan requires General Assembly approval because it exceeds the city’s borrowing capacity. Once borrowed, the massive influx of cash would be invested in the city’s retirement system, which has unfunded liabilities of more than $1 billion.
The city sends a growing portion of its annual budget into the fund, which Elorza says will eventually cut funding for essential city services.
Prior to its approval, the House Finance Committee amended the bill to require that money be borrowed only if the interest rate is below 4.9%, a slight drop from the cap of 5 % provided for in the original bill.
The success of the pension bond is based on the idea that the interest rate on the debt is lower than the rate of return that the state expects to obtain on its investment in pension funds.
The amended version of the bill also requires the city to deposit $10 million in an account for other post-employment benefits — retiree health insurance — which also has a large unfunded liability.
The updated legislation also clarifies that until the bonds are repaid or the pension is 100% funded, the city cannot approve any union contract “that has the effect of shifting the costs of pension benefits employees to the city”.
The enabling law also requires the bond to be approved by a majority of city voters in a special referendum on June 7, even if the law is passed before the election.
The City supports [amended] legislation that was passed tonight by the House Finance Committee,” said Theresa Agonia, spokesperson for Elorza.
“As we have indicated from the start, we will only proceed with the POB if all safeguards are met, including the interest rate cap,” she added.
Treasurer-General Seth Magaziner, who opposed a different, costlier version of a pension bond last year, is this time recommending a series of new safeguards to lawmakers, some of which have been incorporated into the new bill.
But Magaziner had recommended a maximum interest rate of 4.5% and that the bond issue be staggered, which was not included in the amendment.
“Timing is important, and if the product of a [pension obligation bond] are invested shortly before a significant stock market decline, the investment income may be less than the POB’s cost of borrowing,” Magaziner wrote in a letter to lawmakers earlier this year.
Magaziner lives in Providence but has not yet decided how he will vote in the special bond referendum, according to spokesman Ben Smith.
The bill gives the city five years to borrow the money before the bond is no longer allowed, meaning it might not happen during the Elorza administration that ends in January due to limits on duration.
Elorza said the city wouldn’t float the bonds if market conditions didn’t make sense, and interest rates may be too high to stay below the 4.9% stipulated in the legislation at the time. time of its approval.
Providence’s three mayoral candidates said Thursday they would vote in favor of the measure.
“For all voters, I encourage you to vote YES to question 1,” said Councilwoman Nirva LaFortune, one of the Democratic mayoral candidates. “I was cautious at first about this proposal from the mayor – we are taking out a loan to pay off a debt.” But she said the safeguards in place, including the interest rate cap, make it a “viable option”.
Candidate Brett Smiley, also a Democrat, said he intended to vote for the bond but remained “cautious about the proposal as a whole”.
“While I think this is an important tool the next mayor needs to have in his toolbox to meet our pension obligations, I don’t think it’s the only solution and I think approval of voters is an important first step,” Smiley said.
Gonzalo Cuervo, also a Democrat, also said he would vote in favor of the referendum.
“POBs are not an ideal solution, but this one, with safeguards in place, can help bring our pension system to a sustainable level of funding,” Cuervo said.
A union-funded group called the Committee to Save Providence campaigned for the bond vote, spending thousands of dollars on on-the-ground organizing and direct mail.
No organized effort against the referendum has so far been reported to the Board of Elections.
Voters in Providence can vote early in the special election at City Hall until June 6, weekdays from 8:30 a.m. to 4:30 p.m.
They can also vote on Election Day on June 7, when polling stations will be open from 7 a.m. to 8 p.m. Those with mail-in ballots at home must return them before the polls close.