Elorza set to deliver State of the City speech amid financial turmoil in Providence

City Council Majority Leader Kevin Jackson stands in between Mayor Jorge Elorza and Councilwoman Jo-Ann Ryan. (Photo by Dan McGowan/WPRI)

PROVIDENCE, R.I. (WPRI) – When Providence Mayor Jorge Elorza delivers his first State of the City address Tuesday, he’ll likely focus on his goal of building a city that “just works.”

The 39-year-old Democrat will paint his administration as a data-driven organization that closely scrutinizes constituent response times and strives to be more efficient. He’ll tout his effort to streamline the city’s school department in order to improve services for parents and students.

But for all the innovation that Elorza will say occurred during his first year in City Hall, the broader reality is that Providence continues to face a bleak financial outlook, one that has caught the attention of the state auditor general, triggered a downgrade by a major ratings agency and now threaten to force a tax increase in a city the mayor himself has called “taxed out.”

Unlike the governor’s State of the State address, which includes the unveiling her proposed budget, mayors do not release their tax-and-spending plans as part of the State of the City; that usually doesn’t occur until April. But financial matters will still loom large over Elorza’s remarks.

Elorza’s first year in office was dominated by a bitter dispute with the city’s firefighters’ union over the mayor’s plan to increase firefighters’ average work week from 42 hours to 56 hours. The changes have yielded no savings to date and there is no end in sight to the legal battle, which has already made its way to the Rhode Island Supreme Court.

The rest of the problems are all too familiar.

Providence ended the 2014-15 fiscal year with a $5-million deficit, even though Elorza administration officials initially predicted the shortfall would be minimal. Elorza has accused the architect of the budget he inherited upon taking office, former Mayor Angel Taveras, of including too many one-time revenue sources that did not come to pass.

Last year’s deficit was one of several reasons Fitch Ratings downgraded the city’s bond rating to BBB- last week. Elorza maintains that the current budget is on track to stay balanced, but that forecast relies heavily on either no legal decision in the firefighter dispute coming before June 30 or a clear court victory for the administration.

“The administration is committed to finishing the current fiscal year on or under budget and taking the fiscally responsible steps necessary to address the city’s financial challenges,” Evan England, a spokesman for Elorza, said in a statement after the rating downgrade.

When the $5-millon shortfall from last year is added to deficits incurred in 2011 and 2012, the city’s cumulative deficit stands at $13.4 million. The only way to clear that red ink off the books is ending the next five fiscal years with surpluses, as required by state law.

Last year’s deficit led Auditor General Dennis Hoyle to order the city to submit a plan that would address the multiyear shortfall. The city’s response included a combination of cost-cutting initiatives and a reliance on new tax and building-permit revenue from several construction projects set to begin in the coming years. The plan must still be approved by the City Council.

“We are committed to utilizing any newly identified and/or non-reoccurring revenues or revenue-enhancements, along with any spending-reduction or savings programs, to further ease the cumulative deficit,” Lawrence Mancini, the city’s finance director, wrote in a letter to Hoyle.

Then there are the deficits coming down the road.

In a memo submitted to the City Council on Dec. 30, Mancini and Brett Smiley, the city’s chief operating officer, explained that Providence is already predicting a $5.9-million budget shortfall for the fiscal year that begins July 1. That projected deficit is expected to grow steadily to $17.9 million by the 2020-21 fiscal year.

A separate report released by Pennsylvania-based Public Financial Management (PFM) last year showed the city facing a projected shortfall of $11.5 million in the 2017 fiscal year, with the gap reaching $19.1 million by 2021. Elorza used that report to justify his plan to restructure the fire department, a change he said could eventually save the city $5 million annually.

Perhaps the darkest cloud hanging over the city, though, is nearly $2 billion worth of benefits promised to generations of municipal retirees.

Providence’s unfunded pension liability grew to $900 million in 2015, according to an independent audit conducted by New York-based accounting firm Marcum LLP. The fund paid out $97.6 million to retirees during the year, about $6.6 million more than it took in from employee contributions and investment income. As for other post-employment benefits (OPEB), largely health care, the city’s unfunded liability stood at about $980 million as July 1, 2014.

When Moody’s Investors Service cut the outlook on Providence’s credit rating to negative in December, it noted that one in four dollars spent out of Providence’s operating fund – 25% – went to the fixed costs of debt payments, pension contributions and retiree health benefits during the 2013-14 fiscal year.

As part of a pension reform agreement negotiated under Taveras, the city’s annual required contribution to the pension system is expected to increase by about 3.5% a year between 2016 and 2041, when the city’s actuary believes the system could be fully funded. Under that plan, the city’s pension deposit is set to grow from $67 million in 2015 to $72 million in 2016, rising to $159 million by 2040.

Elorza has been tight-lipped about whether he will seek to make further changes to the pension system – though he has said he does not want lower the city’s 8.25% predicted rate of return on its pension investments, a key variable – but City Council President Luis Aponte has said he wants new city employees to contribute more to the system and wait longer to receive their benefit. Others in City Hall have even floated the idea of a pension obligation bond, though Elorza administration officials appear to have little appetite for the proposal.

Planning for the future

For his part, Elorza has developed a reputation for being a serial planner.

Whenever he’s asked about the city’s finances, he quickly pivots to tout a $225,000 grant the city received to help craft a 10-year budget outlook for the city. (During a January interview with Rhode Island Public Radio, Elorza mentioned the 10-year plan four times in eight minutes.) While Aponte has said the city will likely be forced to raise residential property taxes, Elorza has said he wants to wait for results of the 10-year plan.

On Tuesday Elorza will likely make the case that long-term planning will also give the city a better sense of what it can accomplish over the next decade, particularly when it comes to improving the city’s schools. Officials in his office argue that a deeper understanding of when debt will come off the city’s books and what Providence will need to pay for in coming years is crucial when it comes to setting goals.

At a recent community meeting, when he was asked how the city will pay the firefighters if an arbitrator decides it owes them time-and-a-half pay for the 14-hour increase to their average work week – the city’s internal auditor has predicted Providence could end up with a $9-million back pay tab – Elorza claimed Providence plans to set aside savings from the change in a “figurative lockbox.”

“Thinking through what the liability might be, I’ve made a commitment that any dollar that we save through this reorganization gets figuratively held in this lockbox,” Elorza said at the meeting. “And we’re not going to spend a dollar of that until we know that this issue has been resolved.”

A week later, Mancini, the city’s finance director, told the City Council there have been no savings from the changes. He also confirmed there is no actual account designated for any future savings.

At least some of Elorza’s plans have come to fruition.

After taking office with a backlog of thousands of requests from constituents ranging from pothole repairs to mattress removals, Elorza’s center for city services addressed every call.  While not every problem can easily be solved, the mayor’s office now commits to returning phone calls and following up with constituents no matter the outcome.

When an audit of the Providence School Department suggested several clerical workers should be moved from the central office to the city’s schools, Elorza reached an agreement with the clerk’s union to make the changes. He now plans to launch a bilingual call center in the school department that will mirror the city services department in City hall.

Elorza’s speech Tuesday is also expected to highlight what his top aides consider the great equalizer: construction. With the University of Rhode Island/Rhode Island College nursing education center, a massive life-sciences complex on the former I-195 land and several hotel projects on the horizon, Elorza will paint Providence as a city preparing for its busiest building season in a generation. From Elorza’s perspective, efficiency in the city’s permitting system and a standardized tax-stabilization agreement program will only lead to more development in the coming years.

Still, both the administration and City Council know that many of the mayor’s long-term goals – like improving student outcomes, stimulating economic development or reducing crime – all depend in some way on the city’s fiscal health.

Aponte, the council president, said Providence “has more of a revenue problem than a spending problem,” pointing to the massive reduction in state aid the city has seen since 2008. He said he supports Elorza’s goal to require the city’s tax-exempt nonprofit institutions to pay taxes on “non-mission essential” properties.

“Improving the city’s financial outlook is paramount,” Aponte said.

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Dan McGowan ( dmcgowan@wpri.com ) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan

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