EDITORIAL: VOTE NO on Question #1 Borrowing $515M for Providence Pension Obligation Bonds

Monday, June 06, 2022

EDITORIAL

 

View Larger +

Government Finance Officers Issued a warning to all cities and towns not to use this form of financing.

Providence voters on Tuesday will be asked to vote up or down on borrowing $515 million to pay down the city's unfunded pension obligation.

The city’s management of the pension fund to date has been a national embarrassment. Experts locally and across the country have strongly opposed the passage of these pension obligation bonds.

Providence has an obligation to Providence employees and their pensions and Providence employees should have an obligation to ensure that the city does not go bankrupt. 

GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST

A "yes" vote supports authorizing the city to issue $515 million in bonds to fund the city's pension obligations.

A "no" vote opposes authorizing the city to issue $515 million in bonds to fund the city's pension obligations.

 

Here are some critical pieces of information that voters need to know:

 

View Larger +

National Municipal Finance Experts Have Been Warning Cities Against Using This Model

Local and national municipal financial officers are warning about the dangers of this form of financing.

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

"It is my understanding that Providence pension obligation bonds [POBs] are being proposed because the City has no politically viable option. This does not make them any less than a riverboat gamble," added Sasse.

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

 

- The invested POB proceeds might fail to earn more than the interest rate owed over the term of the bonds, leading to increased overall liabilities for the government.

- POBs are complex instruments that carry considerable risk. POB structures may incorporate the use of guaranteed investment contracts, swaps, or derivatives, which must be intensively scrutinized as these embedded products can introduce counterparty risk, credit risk and interest rate risk.

- Issuing taxable debt to fund the pension liability increases the jurisdiction’s bonded debt burden and potentially uses up debt capacity that could be used for other purposes.  

- In addition, taxable debt is typically issued without call options or with "make-whole" calls, which can make it more difficult and costly to refund or restructure than traditional tax-exempt debt.

- POBs are frequently structured in a manner that defers the principal payments or extends repayment over a period longer than the actuarial amortization period, thereby increasing the sponsor’s overall costs.

- Rating agencies may not view the proposed issuance of POBs as credit positive, particularly if the issuance is not part of a more comprehensive plan to address pension funding shortfalls.

 

Stock Market Volatility and Interest Rates Up - More Risk

If there were criticisms of this model a year ago when it was first proposed, then there should be panic that the city is going forward with it now.

Since then, the Federal Reserve has increased interest rates and the financial markets have become unstable.

Former candidate for governor Ken Block warns Providence voters:

Providence's (PVD) proposal to float a half a billion-dollar "pension obligation bond" is fraught with risk, reckless, and another massive example of elected officials "kicking the can down the road."

PVD elected leaders, for decades, have failed to save enough money to properly pay for what in many instances, have been outrageous pensions. PVD leaders have failed to truly reform the city's pension abuses.

The idea behind a pension obligation bond is that a government borrows money, invests the money, earns more per year on those investments than must be paid out in interest on the loan, and then uses the profit to pay down pension liabilities.

Former Wall Street Journal reporter and Providence Journal editorial page editor — and now GoLocal columnist, Robert Whitcomb writes:

I agree with businessman and former gubernatorial candidate Ken Block that the least the city should do if it goes ahead with a pension-bond sale is to insist that retirees and unions agree to pension give-backs and structural reforms -- especially regarding disability pensions.

They’ve benefited from pension benefits that are virtually unheard of in the private sector and rare in the public sector. City and state officials should warn them that they would lose a lot more in a Providence bankruptcy than from givebacks in negotiations that could prevent the bankruptcy. (I’ve thought for a long while that bankruptcy isn’t the worst thing that could happen to Providence.)

 

View Larger +

Providence Mayor Jorge Elorza has offered numerous failed plans to address the unfunded pension liability issue.

Elorza’s Consultant Was State’s Consultant on 38 Studios

The financial firm that designed the plan has done bond work for the Elorza administration and is also tied to one of the biggest controversies in modern Rhode Island history.

That same firm, Dallas-based Hilltop Holdings Inc. unit Hilltop Securities Inc. agreed to pay $16 million to “settle any and all claims in a litigation involving the Rhode Island Commerce Corp.” over the infamous failed video gaming company headed by former Boston Red Sox Pitcher Curt Schilling

The litigation was related to The Rhode Island Economic Development Corporation Job Creation Guaranty Program Taxable Revenue Bond (38 Studios, LLC Project) Series 2010.

In 2016, the Rhode Island Commerce Corp. entered into a proposed settlement agreement with two other firms — Wells Fargo Securities LLC and Barclays Capital Inc. — in connection with the issuance of bonds related to 38 Studios, a startup video game company.

As GoLocal reported in February of 2017:

After legal fees -- a total of $11.34 million to state attorney Max Wistow -- Rhode Island will recover $49.66 million in settlements in the 38 Studios litigation, after the Rhode Island Commerce Corporation announced that they settled with the last remaining defendant, First Southwest. 

In a legal strategy developed under Governor Lincoln Chafee, the state will realize more than half of the approximately $88 million state moral obligation on the 38 Studios bonds for both past and future appropriations. 

Commerce announced Wednesday that it agreed to a $16 million proposed settlement with Hilltop Securities Inc. (formerly First Southwest Company) in the 38 Studios litigation.

"We have reached a settlement with the Rhode Island Commerce Corporation that once approved by the court will resolve the 38 Studios matter. This resolution contains no admission of liability or wrongdoing and it allows our firm to put this matter behind us and move forward on the important work we undertake for municipal clients across the country."

GoLocal understands that the unions have funded a campaign to urge union city employees who live in Providence to vote for passage. This is a mistake both for union members and for city taxpayers. The risk is far too great for an epic financial failure.

Vote NO on Question 1 on Tuesday.

An editorial is the opinion of a publication — specifically, the ownership.

While based on facts and news reporting, it is an opinion intended to discuss critical community issues. Often, the opinion is written with the intention of positive change.

GoLocal editorials have sparked conversations, change, and even the naming of a bridge.

LEARN MORE HERE
 

Related Articles

 

Enjoy this post? Share it with others.

 
 

Sign Up for the Daily Eblast

I want to follow on Twitter

I want to Like on Facebook