PROVIDENCE, R.I. (WPRI) – With Elorza administration officials still crafting a plan to address Providence’s long-term financial challenges, the director of the R.I. Department of Revenue (DOR) is taking a cautiously optimistic approach when it comes to City Hall.
Robert Hull, a former managing director at Providence Equity Partners who has been leading the DOR for four months, sat down with Eyewitness News to discuss Providence’s projected structural deficits, its unfunded retiree obligations and his view on municipal bankruptcy.
The interview has been lightly edited and annotated for length and clarity. (Note: Susanne Greschner, who heads up the DOR’s division of municipal finance, sat in on the interview and makes several cameo appearances in this Q&A.)
Q: How much did you talk about municipal finances when you were interviewing for the job?
Hull: It’s a big piece of our equation here in DOR. Its relevance and importance goes up with probably the economic health of the state and the nation. If you look at the work [former revenue director] Rosemary Booth Gallogly did both in helping draft the Fiscal Stability Act and living through the handful of restructurings that she lived through, it can be all of your time if you’re not careful. I got great information from great people, including her and [former acting revenue director] Marilyn McConaghy and others around. I fully expected that we would spend a bit of time trying to focus on it. The governor, in recruiting me for the role, definitely wanted input on it and wanted attention on it.
Q: What are your concerns about Providence?
Hull: I’ll start with the positives. Because we never get a chance to reflect on what they’ve done right, I think it’s worth it. [Mayor Jorge Elorza and Chief Operating Officer Brett Smiley] have really put their shoulder into trying to put their fiscal house in order. Everything from the NRN study to trying to make this year’s budget more pragmatic in terms of, “We’re going to put numbers in that we’re going to hit. We’re going to try to put forth a plan that is attainable in every way.” So that’s encouraging.
They’re working on it. They have a plan and they made their [annual required contribution to the pension system] last year and they’ve told us they’re going to make it this year. They have a structural deficit that they’ve told us they have intents on making their $4.3-million payment when the dust settles on the numbers [in the current fiscal year]. So those things give me comfort.
What gives me discomfort? There’s a structural challenge for Providence, Rhode Island. Between pension and [other post-employment benefits (OPEB)], we have $2-billion of unfunded liabilities or a 27% funded ratio [for the pension system]. It’s very difficult to get around that. You have a tax base and a cost structure that are not always commensurate one with the other. They’ve done a great job to balance them, but we’ve got to look at the tax base we have and look at the obligation set we have on the other side and work through the structural imbalance there. They do have a long-term plan and they need to live to that.
Q: Some say the pension is a real problem and OPEB is more of a created problem. What do you think?
Hull: First of all, you have to look at both. It’s $2 billion of exposure, but I agree with your statement. As I explore with Susanne what the rest of the nation has or hasn’t done with OPEB, I don’t think we’re behind the pack on that. The problem is that when you add that to an already-taxed base of revenue and income, it adds to the concern. But clearly the bigger concern is the unfunded pension component.
Greschner: The OPEB is not as much a concern as the pension, but rating agencies look at this. Starting in fiscal year 2018, [the Governmental Accounting Standards Board] does require municipalities to put that on their balance sheet. It doesn’t mean they have to fund it, but they have to show it. And rating agencies always look at your legacy costs. And we know with OPEB, no one can fund it. This is not just in Rhode Island, it’s a national problem. However, if municipalities don’t even have a plan to fund it, this is usually considered a credit negative.
Q: Providence still has a cumulative deficit, which means it has no rainy day fund. How much attention are you paying to that?
Hull: Reserves is really the same issue as the long-term structural issue. What fuels a capital reserve is surplus. If your income exceeds your expenses, you create surplus, you pay off your structural deficit and you also have liquidity with which to start to pay off some of that 27% funding ratio. They’re very related. It is a concern. The piece behind the reserves is how do they handle shocks? When you’re always up against the wire, you don’t have a lot of room for error.
Q: There are some people who believe Providence should file for bankruptcy. What do you make of that?
Hull: Two things: It’s not a cure-all, but it’s not crazy. That’s the last step in a long continuum of structural fixes. You don’t want to get to that until you’ve worked through the other matters and that’s why I applaud the work that the mayor and COO have done. Things like the Fiscal Stability Act contemplate multiple steps all the way to the end and it’s so far to the back end. While it allows for that long-term stuff to be restructured, it doesn’t necessarily solve everything. And there’s the law of unintended consequences.
Q: It doesn’t seem like Providence is at that end point yet.
Hull: They aren’t. They absolutely aren’t. But absent real progress on the structural long-term mismatch, something has to change a little bit. I think there are other steps before you get to that, but that’s one of the places where you can alter that long-term asset/liability mismatch.
Q: The mayor’s office just released a report outlining a series of options for addressing Providence’s financial issues. How much is the state encouraging the city to consider some of those options?
Hull: We’d like to see them serve up which of that buffet of options they want to pick, whether it’s the water utility or whether it’s something more aggressive in negotiating with their collective bargaining agreements. They’ll serve that. They need to come out and tell us what they want to do. But make no mistake, they need to come up with some solutions.
Q: Plenty of people in Providence, including Council President Luis Aponte, say the city has more of a revenue problem than a spending problem. They usually point to the state slashing the motor-vehicle reimbursement to cities and towns a few years ago. What do you think?
Hull: I don’t think of it as a revenue and expense mismatch. It’s actually an asset and liability mismatch.
Q: How much are you monitoring the dispute between the city and its firefighters?
Hull: We are monitoring it. They need to fix it and solve it. When I [talk about shocks], that’s one that we have in back of our mind. It’s concerning. When you don’t have a big capital reserve, or any capital reserve, that kind of thing hurts. So we’re watching.
Q: You’ve mentioned the Fiscal Stability Act a few times. Does that law need to be changed to give the state the ability to step in sooner when a municipality has financial issues?
Hull: I think there are elements of it that are opaque, but if you ask some of our team here, they would say some of that is by design. We want to make sure that we have the latitude to work through the issues. Even though the criteria that step you toward the first stage of the Fiscal Stability Act are some real hurdles, if there’s a fiscal crisis, there’s a provision in it to move more quickly to a more accelerated state. In my mind, if you had a fiscal crisis for a given municipality that we could clearly say we agree on, I don’t think there’s any lack of teeth.