By Brian Chappatta and Annie Linskey
NEW YORK - Providence was so close to running out of cash a year ago that it couldn’t pay for tires on police cars. This month, Wall Street lined up to lend to Rhode Island’s capital, shrinking its yield penalty 30 percent.
Providence’s path toward fiscal health went through the bank accounts of about 1,600 pensioners. They voted to freeze cost-of-living raises for a decade, a move that may be unprecedented, said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. The deal helped Providence avoid the fate of neighboring Central Falls, which in 2011 became the first city in Rhode Island’s 222-year history to go bankrupt.
City leaders have “done what they are supposed to do,” said Dennis Derby, a senior analyst who manages $31 billion in municipal assets at Wells Capital Management in Menomonee Falls, Wis., and owns Providence bonds. “They’ve been very astute.”
Cities and states nationwide are grappling with public pension benefits more generous than their budgets can accommodate. To make up for the shortfalls, elected leaders have raised taxes, sold assets, borrowed from Wall Street and rewritten pension laws. There’s a $217 billion gap between what localities have promised retirees and what they’ve saved toward those obligations, according to a survey of 61 cities released in January by the Pew Charitable Trusts in Philadelphia.
When Mayor Angel Taveras, a 42-year-old Democrat, took office in January 2011, he faced a $110 million projected shortfall in the city’s $613 million budget for the fiscal year through June 2012.
He closed schools, raised taxes, boosted parking rates and obtained increased payments from nonprofit institutions, including Brown University and the Rhode Island School of Design. The city of 178,000 put millions of dollars of payments to vendors on hold.
About 20 percent of city spending cuts came from changes to a retirement plan that had allowed some workers to earn twice as much annually as they did when they were employed. Twenty-five retirees made more than $109,000, Providence data show. Average fire and police retirees receive about $40,000 a year, according to city figures. While the checks will keep coming, the annual boosts of 3 percent to 6 percent won’t.
“I don’t think anyone thinks this is a fair settlement compared to what they were getting,” Bob Jarvis, president of the Providence Retired Police and Firefighters Association, said at a public hearing this month. “It was the best deal we could get.”