Here’s what a $9.5M surplus actually means for Providence

Downtown Providence skyline - Waterplace Park - generic Providence

PROVIDENCE, R.I. (WPRI) – If you heard Providence posted a $9.5-million surplus and are wondering when you’ll be getting a tax rebate, here’s some advice: don’t hold your breath.

What Mayor Jorge Elorza announced Monday was that Providence spent $9.5 million less than the $696 million it expected to spend between July 1, 2015 and June 30, 2016, a significant accomplishment for a city that was facing a $13.4 million cumulative deficit when the year started.

So what does it actually mean for the city? Let’s take a closer look.

Q: Seriously, when can I have my piece of the $9.5 million?
A: If Mayor Elorza’s money bin actually contained an extra $9.5 million, then it’s true that he could propose some sort of a tax reduction. Of course, the mayor and City Council would have to decide that a tiny tax cut is the best way to use that extra money, as opposed to, say, infrastructure needs or investments in education. But none of that matters because Providence doesn’t actually have an extra $9.5 million stuffed in its couches. The reason: It started the year $13.4 million in the hole based on deficits incurred during the 2011, 2012 and 2015 fiscal years. So all of that surplus money from this year goes toward deficit reduction.

Q: So Providence is actually still $3.9 million in the red, right?
A: Yes, but let me explain that a little more clearly. Providence started the 2015-16 fiscal year with a $13.4-million cumulative deficit and state law requires municipalities to eliminate those shortfalls within five years. Any operating surplus the city shows – like the $9.5 million it ended up posting – goes toward paying down that cumulative deficit. Think of it like working out a deal with your credit card company to pay down a $10,000 bill over five years, but rather than simply having monthly payments, the company also gets any of the other income you don’t spend over the course of a year. (Warning: That would be a really bad deal.) Of course, the big difference between the credit card situation and the city’s cumulative deficit is that Providence isn’t actually making a payment anywhere. It just needs to report a surplus on paper to meet its deficit reduction requirements.

Q: Once the cumulative deficit is erased, will they start giving my money back?
A: Unlikely. For the current fiscal year, Providence has set aside $6.1 million for deficit reduction, which basically means it has built a $6.1-million surplus into its $717.9-million budget. If the city is successful, that would mean it would be posting a $2.2-million cumulative surplus around this time next year. That money would likely be set aside for reserves, which are commonly referred to as the rainy day fund. Experts say it would be a good financial practice if the city had a rainy day fund that was 5% of its operating budget – roughly $36 million. In 2008, the city had $22 million in reserves, but those funds were rapidly drawn down after massive cuts in state aid and the economic downturn. That’s what has both ratings agencies and finance observers concerned about Providence right now. If there was a sudden shift in the economy (or something catastrophic happened locally) the city might not have the ability to absorb the hit because it has no money in its savings account.

Q: How much of this surplus is simply the city kicking the can down the road?
A: It’s certainly a factor. But here’s a different way to look at it: Let’s pretend you wake up on Jan. 1 knowing that after taxes, you’re going to bring in $50,000 for the year. And let’s say you decide to map out how every dollar you make is going to be spent for the whole year, including bills, groceries and even $2,000 for a sweet Disney vacation in May. But when May rolls around, your kid decides that he hates Mickey Mouse and you choose to cancel the trip. At the end of the year, you could end up spending $2,000 less than you expected. If you were required to report that publicly, you’d have run a $2,000 surplus. In Providence’s case, it didn’t cancel a luxury like a vacation; it canceled necessities like police and fire academies. The city also didn’t set any money aside for what it could eventually owe the firefighters in back wages for their ongoing legal dispute. But because Providence simply spent less than it took in during a 365-day period, it can report a surplus.

Q: You haven’t even mentioned the pension system yet.
A: That’s a larger issue. As of June 30, 2015, the city’s unfunded pension liability was $951.8 million and its tab for other post-employment benefits (OPEB), like retiree healthcare, was around $1 billion. But all of that money isn’t due today. Think of it like owing $100,000 on your mortgage and $50,000 in student loans. You have to pay those bills monthly, but no one is chasing you down for the full amount this year. (There’s a good chance you would still consider yourself in debt, but again, you aren’t required to report your finances publicly.) The challenge the city faces is that its pension and OPEB issues are so big it will likely take a major influx of cash – like the sale of an asset – or reductions in retiree benefits in order to make a dent. Under the city’s current pension funding plan, the amount it is required to pay annually is projected to increase by 3.5% a year until 2040; by 2026, Providence would be contributing $200 million a year.

Q: What does this mean for the rest of Mayor Elorza’s first term?
A: The city still has a lot of work to do. The current budget raised taxes by about $13 million and the mayor says he doesn’t anticipate another tax increase for the budgets he proposes in 2017 or 2018. At the same time, the cost of business will go up. Every city employee will see modest raises over the next several years. Healthcare costs are always on the rise. But revenues are also likely to increase. As we see more construction projects in the city, that means more permitting revenue immediately and taxes in the long run. You also might remember the 10-year study Mayor Elorza has discussed in recent months. That plan recommended more than dozen potential changes the city could make to cut expenses and raise revenue. The mayor currently has working groups in place to analyze alternate streams of revenue, the city’s financial relationship with its major nonprofit hospitals and colleges and infrastructure needs.

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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