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Elorza’s Pension Proposal Relies on a Risky Approach and an Adviser Linked with 38 Studios

The underfunded pension system in Providence is like a time bomb. That’s because the huge shortfall for long-term obligations threatens to overwhelm other parts of the city’s budget. But there are a lot of questions about Providence Mayor Jorge Elorza’s latest proposed fix. Rhode Island’s House Finance Committee is expected to hold an initial hearing on Elorza’s plan this week or next week.

Providence’s pension crisis has its roots in the late 1980s. That’s when the city’s Retirement Board approved unusually generous compounded cost of living adjustments for more than 2,500 city workers and retirees. Decades later, that move helps explain why there’s a $1.2 billion gap between the pension balance and the amount owed to current and future retirees.

The pension crisis has defied attempted solutions for years. Providence o cials say the city has just 22 percent of the money needed to meet its long-term pension obligations. And the amount of the city budget consumed by the pension is growing 5 percent a year, to about $93 million currently. Without a change, that annual payment will rise to $227 million by 2040.

Mayor Jorge Elorza said these pension costs are unsustainable.

“It’s only a matter of time before they continue to squeeze everything else out of our budget, so that we’re cutting deeper and deeper into the bone,” he said during a recent news conference.

Elorza’s plan involves selling $704 million in pension obligation bonds. The idea is that these bonds could generate enough of a return to boost the pension system’s funding to more than 60 percent.

“The favorable conditions in the market, historically low interest rates, combined with our improved credit rating, has brought our credit rating to a point where we can take advantage of a very low interest rate for something like this that begins to make it worth it,” Elorza said.

But pension obligation bonds are considered risky – so risky that a national group, the Government Finance O cers Association, declared in 2015 that state and local governments should not use them. The concern is how bond proceeds sometimes earn less than Mayor Elorza speaking with reporters

the interest owed over the life of the bond, leading to even higher liabilities for the municipality or state in question.

That’s part of why the Rhode Island Public Expenditure Council, or RIPEC, a business-backed fiscal watchdog group, opposes Elorza’s plan.

Besides the risk of pension obligation bonds, RIPEC head Michael DiBiase said such a large amount of borrowing would remove pressure for benefit reform, like getting current city employees to contribute more toward their pensions.

“I also think there’s an issue in how the city is really not in a great position to absorb if this thing goes the wrong way,” DiBiase said, “and there is a concern that the state taxpayers will need to step in and backstop whatever issues that might arise.”

Critics also question the role of Hilltop Securities, a firm that has been advising the city for years and is the consultant on the pension proposal. That’s because the company, back when it was known as First Southwest, was among the entities sued by the state for negligence, fraud and legal malpractice over the failure of former Red Sox star Curt Schilling’s video game company, 38 Studios.

Lincoln Chafee was governor when the company went bankrupt. Chafee initiated the lawsuit and he hired lawyer Max Wistow to try to recover the millions lost due to the failure of 38 Studios. The company was attracted to Rhode Island with the help of a $75 million state loan guarantee.

In 2017, Hilltop was the last defendant in the lawsuit when it agreed to make a $16 million settlement without acknowledging any wrongdoing.

Elorza stands behind the company.

“They’ve advised us as they advise a number of other municipalities, not only in Rhode Island but throughout the country,” he said. “And they’ve helped us close on bonds such as the recent one for the a ordable housing bond. They allowed us to realize $6 million more than we thought we were going to realize through the bond o ering. So, they have served us well.”

But back in 2015, state General Treasurer Seth Magaziner cited the company’s connection with 38 Studios in leading a successful move to oust it as the state’s financial adviser. However, as The Public’s Radio reported that year, Hilltop Securities continued to serve as a financial adviser for one-third of the state’s communities on bond issues and for seven quasi-public state agencies.

Head of the good government group Common Cause of Rhode Island John Marion said these ongoing relationships are a head-scratcher.

“To some degree, it boggles the mind why a firm that’s associated with the largest financial scandal in a generation in Rhode Island would continue to receive so much business from such a variety of governments in the state,” Marion said.

Magaziner, who, like Elorza, is expected to run in next year’s Democratic gubernatorial primary, declined an interview request for this story.

Gary Sasse, head of the Hassenfeld Institute for Public Leadership at Bryant University, says the link with Hilltop Securities muddies what is already a contentious proposal for Providence’s pension system.

“The project itself is so complex and involves so many moving parts and has so much risk that this conversation doesn’t help focus on what the real objective is here,” Sasse said.

A spokesman for Hilltop Securities did not respond to an interview request for this story.

Elorza acknowledged that shoring up Providence’s pension through pension obligation bonds is risky. But he says the risk of doing nothing could be worse.

His latest proposal comes a few years after a di erent plan -- to monetize Providence’s water supply -- failed to attract legislative support.

The mayor’s current pension plan also requires General Assembly approval.

Elorza has a champion in the state Senate, where the third-ranking member, Majority Whip Maryellen Goodwin of Providence, is firmly behind the proposal. But the outlook is uncertain on Smith Hill, including in the House of Representatives.

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