Rhode Island bakes OPEB into debt affordability study
Rhode Island’s latest comprehensive debt affordability study — which for the first time integrates other post-employment benefit liabilities into affordability targets — reveals “more good news than bad” among its issuers, according to state General Treasurer Seth Magaziner.
“The good news is that like the state, most of the cities and towns have debt levels that are generally affordable, with acceptable ranges,” Magaziner said in an interview. “Then we have a handful of municipalities that have some challenges.”
Including OPEB liabilities more accurately reflects debt levels and coincides with bond rating agency trends, according to Magaziner.
“We feel that when you try to determine worthiness if a credit whether it’s local, state or a quasi-public agency, you can’t look at it in isolation,” Magaziner said. “Increasingly the rating agencies are doing it that way.”
This is the second affordability study Rhode Island has conducted since the General Assembly, at Magaziner’s behest, enacted a series of measures designed to strengthen debt management. They included a requirement that the Public Finance Management Board, which Magaziner chairs, issue a debt affordability study every two years to recommend limits for all issuers of public debt statewide.
The first such report, in 2017, received national recognition.
Fitch Ratings and S&P Global Ratings rate Rhode Island’s general obligation bonds AA, while Moody’s Investors Service rates them an equivalent Aa2. All three assign stable outlooks.
“At this time we are not incorporating OPEB directly into our primary long-term liability metrics,” Fitch director Eric Kim said. “We’ll review them and where the levels are high, for a state like New Jersey or a city like New York, we’ll incorporate them into our discussion and commentary.
“On the spending side, we do include OPEB contributions, along with pension contributions and debt service as part of our assessment of fixed carrying costs,” Kim said.
James Spiotto, a managing director at Chapman Strategic Advisors LLC, warned against a one-size-fits-all approach among states.
"It's a good idea to do it in one sense, but not across the board," Spiotto said. "In various states they do not treat OPEB the same way you treat pensions; they're not treated as a contractual obligation."
Because of Rhode Island’s diverse population and the varying functions of its quasi-public entities, the PFMB did not recommend a single limit for public debt across all issuers.
“A number of states do this,” said Kim, who cited Virginia, Vermont and Maryland. “Many states have similar studies and some municipalities have, too. They essentially say ‘this is what we can afford to do.’ From a rating-agency perspective, it makes sense. This is one way states can assess their ability to fund capital needs.”
Overall, Rhode Island, its municipalities, quasi-public agencies and special districts had a combined $21.3 billion of debt outstanding for fiscal 2018. The state itself has nearly $6 billion, quasi-public agencies nearly $7 billion and municipalities and special districts nearly $9 billion.
Cities that exceed recommended limits and need further attention from local leaders included Central Falls, Johnston, Pawtucket, Providence, Warwick, West Warwick and Woonsocket.
Central Falls, for example, had overall debt and net pension liability and OPEB liability at 13.8% of its assessed value. The recommended maximum is 9.2%. The city’s ratio of governmental debt service plus actuarially determined pension contribution plus its OPEB required payment to governmental expenditures totaled 22.7%, just above the 22.5% recommendation.
“Rhode Island is a bit unique in that its study includes affordability by local governments as well,” Kim added. “There is also value to seeing all the local government levels in one report.”
The report’s authors said the study was not intended to single out any public entity, “and this report should not be read as a criticism of an entity that has a level of debt in excess of its recommended target.”
Capital city Providence was also above the recommended limits in three of four categories.
“In many of these cases the local leaders inherited problems and are trying to work through them,” Magaziner said.
Central Falls, for example, filed Chapter 9 bankruptcy in August 2011 and exited a year later after cutting pension benefits.
"In the course of drafting the report, we sent it to the cities and towns, so they had a chance to review for accuracy and provide feedback,” Magaziner said. “We did not receive any pushback and on most cases, the cities and towns were appreciative.”
Among the quasi-public agencies, the Rhode Island Turnpike and Bridge Authority, the Rhode Island Resource Recovery Corp. and the Rhode Island Airport Corp. exceeded limits in some categories.
Despite the strong financials for Resource Recovery, the report recommended the agency refrain from any new long-term issuance until “there is a clear plan for what the corporation will do when the landfill reaches capacity.” At current loading rates, the state’s Central Landfill in Johnston will reach capacity in 2034.
According to the report, some of the state’s most highly indebted municipalities have made their debt burdens become more affordable since the prior study two years ago.
For example, Woonsocket’s overall net debt has fallen to 7.5% of assessed property value in FY17 from 10% of assessed property value in fiscal 2015, Similarly, Providence’s net debt to assessed value has fallen to 3.7% from 4.4%.
PFMB partnered with the Center for Retirement Research at Boston College to develop a model under which the pension and OPEB liabilities of all 50 states were adjusted to conform to the discount rate and amortization that Rhode Island uses for its pension and OPEB systems to provide an “apples to apples” comparison of state liability burdens.
Rhode Island ranks 17th in debt service plus pension arc plus OPEB arc relative to own source revenues, with Connecticut the highest. Rhode Island ranked 14th by level of total liabilities relative to personal income, with Illinois the highest.
Gov. Gina Raimondo signed Rhode Island’s $9.9 billion budget on July 5, while criticizing lawmakers for cuts in economic development initiatives. “Our progress is put at risk,” she said.
“Rhode Island’s biggest challenge is its economic growth profile. Rhode Island was hit particularly hard by the recession,” Kim said.
“Their long-term liabilities [13% to 14% of personal income] are high for a state, but not debilitating by any means. It is one of the few states that pays its full actuarial assessment for OPEB.”
According to Spiotto, economic viability is important for states and cities on the rebound.
"We need to make investments into communities, programs such as job training," he said.