PROVIDENCE, R.I. – At the annual St. Patrick’s Day parade in Providence, a retired firefighter approached Mayor Angel Taveras, visibly upset about the city’s deal to reduce pension benefits for public safety retirees.
“He was telling me how really unhappy he was about the deal,” Taveras said Tuesday during a lengthy interview at City Hall. “Then he said to me: ‘I know you’re trying to fix it. It’s not your fault.’ He said it three times. This also showed that he gave me a little bit of the benefit of doubt.”
Providence last year crafted a series of pension and health care benefit reductions that is pending final court approval. They would reduce the city’s costs by suspending cost-of-living adjustments for retired pensioners for 10 years and transfer retirees to Medicare. They would provide an estimated $14.5 million of annual savings – or 3% of the general-fund budget in Rhode Island’s capital – in pension contributions and reduce its unfunded pension liability by $200 million, or 22% down from $900 million.
State Superior Court Judge Sarah Taft-Carter last week called the deal “fair and reasonable,” and scheduled a hearing for April 12.
Moody’s Investors Service termed the judge’s ruling a credit positive. Before the settlement, the city of 178,000 had received multiple bond rating downgrades from Moody’s, Fitch Ratings and Standard & Poor’s over the last two years.
Fitch and Standard & Poor’s each rate the city’s general obligation bonds BBB, while Moody’s assigns a Baa1 rating.
Pension overhaul has been a hot-button issue in the nation’s smallest state, where union clout had traditionally held sway.
Rhode Island passed a landmark bill altering state employees’ pensions in 2011, with Gov. Lincoln Chafee signing the legislation that General Treasurer Gina Raimondo championed. The law is in mediation after some state public-sector unions challenged it. Meanwhile, 19,000-population Central Falls made pension benefit cuts of up to 55% while in Chapter 9 bankruptcy.
But pension liability still hovers over most other municipalities in the Ocean State. Taveras, who 14 months ago called his city’s financial landscape a “Category 5 hurricane,” has been able to keep Providence out of bankruptcy through pension reform, increased contributions from nonprofits and targeted cost-cutting. The city has knocked off all but $4 million of a $110 million structural deficit.
“What they’ve done down there has been quite tremendous,” state revenue Director Rosemary Booth Gallogly said of Providence officials.
“This was not easy,” said Taveras, whose city hosted The Bond Buyer’s conference on distressed municipalities earlier this week. “I wasn’t sure whether we would get a [pension] deal. People weren’t happy. But it was important that I listened. People need to listen to each other -- not hear, but listen. Some of the things they said, I didn’t have an answer. But if I did nothing, I wouldn’t be doing my job.
“We had to be able to get everybody to buy in and be part of the solution. A lot of employees pointed to the nonprofits and asked if they would contribute more and we said ‘Don’t worry, they’re going to do their part.’”
Harvard-educated Taveras, 42, the son of Dominican immigrants and a former housing court judge, grew up in the South Side of Providence. Elected in 2010, he is the city’s first Hispanic mayor.
“I’ve known Angel for many years at the personal level and for several years at the professional level, and he’s always conducted himself very thoughtfully and methodically. And that’s carried over to what he’s doing in Providence,” said Cranston Mayor Allan Fung, who attended Classical High School in Providence with Taveras.
“Providence reached an agreement that avoided more draconian measures such as bankruptcy and that sends a more positive signal.”
Taveras, whose soft-spokenness belies his tenacity, has repeatedly conveyed the message since taking office that it’s not business as usual at a City Hall noted for its political-machine ways, that was once the stomping ground of Vincent “Buddy” Cianci, the bombastic 21-year mayor who served prison time for racketeering and now hosts a local radio talk show.
Taveras, for example, stood his ground with the City Council over how to spend $40 million in road-repair bond money that voters approved by a 9-to-1 margin in a November referendum.
While some council members wanted to disperse the funds by precinct, the Cianci way, Taveras insisted on using Army Corps of Engineers data to determine which streets get fixed first and threatened to veto the measure otherwise. The council relented.
“I said I was not going to do it the old way. It’s not the way I do business,” said Taveras, who admitted that the slow pace of change in his city sometimes frustrates him. “I wish it were faster to some degree.”
In what Taveras and his advisors considered a bellwether on investor perception, Providence three weeks ago sold those road-repair bonds at lower-than-expected interest rates. “We were oversubscribed. It was a sign of optimism,” said Taveras, a rumored candidate for governor in 2014.
Raymond James led a syndicate that included Janney Montgomery Scott, Roosevelt & Cross and Siebert Brandford Shank. Investor yields for $40 million, 20-year bonds ranged from 0.78% to 3.93%, resulting in an interest rate of about 3.66%, much lower than the 5% City Hall had projected, and annual payments of roughly $2.9 million. Providence, which received more than $11 million in retail orders, expects through the lower rate to save $200,000 per year on debt service.
Providence also last month sued longtime actuary Buck Consultants LLC in U.S. District Court, accusing the firm of miscalculating $700,000 of savings it expected to achieve through pension overhaul. “They made a mistake and they should pay, not the taxpayers,” Taveras said.
The city is also rebuilding its depleted rainy day fund. In fiscal 2013 it earmarked $5.7 million for that purpose.
Providence particulars aside, common themes such as pensions and state restrictions emerged at The Bond Buyer conference.
“We are not alone,” said Fung, a Republican whose 80,000-population city is about five miles southwest of Providence. “Many municipalities and states across the country are grappling issues as they relate to legacy costs.”
Fung has a local unfunded pension problem for certain police and firefighters hired before 1995, he acknowledged in a keynote luncheon speech. “It’s a closed plan that is upside down,” he said of a plan that has only 48 active employees compared with 435 retirees and beneficiaries. It is only 16% funded and has an unfunded liability of nearly $300 million.
“This is one of the worst funded plans in the state,” Fung said.
“Bonded debt gets the headlines, but the pension problem is really the monster,” said William Rhodes, a partner with Ballard Spahr LLP and conference co-chairman along with Dean Kaplan, a managing director of consulting firm PFM Group Inc. Both work out of Philadelphia.
Another concern was that states are handcuffing localities. “In a lot of ways our hands are tied with decisions made well in the past,” said Fung.
“The similarity of problems is what struck me. Not the causes, but the solutions and how to pursue them,” said Gerald Cross, the executive director of the Pennsylvania Economy League’s central division. Rhode Island’s intervention steps, according to Cross, parallel Pennsylvania’s revisions to its Act 47 workout program for distressed communities.
With shared services becoming increasingly popular in areas ranging from garbage collection to Internet technology -- Chafee last year formed such a committee among Central Falls, East Providence and Pawtucket -- Michael D’Amico, Taveras’ chief of staff, would like to extend the concept to financial services.
According to D’Amico, several communities could share an advisor. “You could have one or two people advise multiple communities, especially in times of crisis. It would produce economies of scale, like anything else.”
Michael Solomon, a managing director at Ramirez & Co. in New York, said municipal expenses must equate to revenues.
“Numerous local governments are facing serious financial challenges all over the country. It’s pretty clear that on the local government level we have a systematic problem that is perpetuating structural budgetary imbalances,” he said. “The path we’re going down currently is not sustainable. Something has to be done because if the economy continues to lag it will only get worse.”