Providence, Rhode Island, voters approve $515 million of pension bonds

BY SourceMedia | MUNICIPAL | 06/08/22 04:00 PM EDT By Chip Barnett

Voters in Providence, Rhode Island, approved a bond referendum authorizing the issuance of up to $515 million of pension obligation bonds.

The referendum passed Tuesday by a 70% to 30% margin. However, only about 4% of the eligible voters turned out, with the actual count being 3,545 votes for and 1,519 against in a city of 190,000.

In May, city officials went to the state Legislature with a reworked plan for issuing pension obligation bonds to shore up its underfunded pension system. The state House has approved the sale of the bonds.
Voter approval of the bond referendum had been mandatory before the issuance could move ahead.

The City Council now must give final approval for the bond issuance, which would finance contributions toward the unfunded pension liabilities.

The city?s pension fund is only 24% funded and faces a $1.2 billion liability that is continuing to grow. The city also has a $1.1 billion liability for other post-employment benefits, which the city says is under control.

Last year, the Legislature turned down the city?s plan to issue $850 million of pension bonds, with some critics calling the plan too big and too risky.

The city came up with a reworked plan this year that tried to remove some of the risks while addressing the fact that its pension expenses grow about 5% a year.

Mayor Jorge Elorza told the Legislature that the new plan was better than what had been proposed last year. The size of the bond issue was decreased and several other actions were taken to add safeguards not included in the original proposal.

Elorza said the city?s financial advisors were tracking market conditions closely and would be ready to go to market about 45 days after final approval. If issued, the POBs would have a maximum 25-year maturity.

Last year, State General Treasurer Seth Magaziner opposed the bond issuance, calling the $850 million plan too risky for the city.

This year he was mostly supportive of the city?s request, but made several suggestions, some of which the city took, such as cutting the size of the bond, and some that it did not, such as lowering the total interest rate cap from the 4.9% the city is planning to use to a cap of 4.5%.

Magaziner's spokesman Ben Smith told The Providence Journal that the treasurer is "disappointed" that some of his recommendations were not incorporated, but will back the bond anyway.

Elorza said last month that by issuing pension bonds the city stood to see about $180 million in net present value savings.

?We?re hoping interest rates remain low, but ... there?s also a guardrail ? a total interest rate cap. So if it reaches about 5%, we can?t do it,? he said.

Fitch Ratings rates Providence general obligation bonds A-minus and assigns the city a BBB issuer default rating. S&P Global Ratings rates the city's GOs BBB-plus and Moody's Investors Service (MCO) rates them Baa1.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.