Tapping Scituate: Can Providence drinking water keep the city's pension system afloat?

In 1918, workmen were busy at the headwaters of the north fork of the Pawtuxet River in Scituate, building the dams that would create a drinking-water reservoir to assure not only the city of Providence’s livability, but its economic prosperity.

In 2018, Providence is hoping the Scituate Reservoir can save its economy again, this time by tapping it to help fill the city's poorly funded pension system. 

Providence is asking the General Assembly to let it lease out the Providence water system, which includes the Scituate Reservoir, the land around it and the pipes that carry drinking water to about 60 percent of the state's residents. The system has been valued at about $400 million. Providence Mayor Jorge O. Elorza and the Providence Water Supply Board, which runs the system, have declined to speculate about how much money leasing the system would generate.

Elorza wants to use the revenue from a lease to help pay down the city's unfunded liability in its pension system. The city can now cover only about 30 percent of its pension obligations, currently estimated to be about $1 billion.

Under the state's standard, any pension system less than 60-percent funded is in critical condition.

Water-system lease payments could go toward the city's pension obligations, freeing up city revenues to improve schools and streets and reduce dependence on state aid.

Sustaining the pension system is projected to get more expensive every year. Consultants have estimated that in 2024 the city will need to pay $101 million into its pension fund.

Tapping the value in the water system was a recommendation by the National Resource Network, part of the federal Department of Housing and Urban Development. Its 2016 report on the city's finances said monetizing the system “could meaningfully address the affordability for taxpayers and the sustainability of benefits for retirees.”

“We’re not asking for a bailout from the state,” Elorza said. “We own the system. We have the plan. All we need is authorization from the state.”

Others aren’t so sure. The Public Utilities Commission, which reviews water rates, says ratepayers, not the city, have paid to build up the system, and if there’s a leasing windfall to be had, it should be shared with them.

Mayors in cities and towns served by the water board say they don’t want to see their residents pay higher rates to cover Providence’s pension problem. Those communities include North Providence, Cranston, Warwick, Johnston, Smithfield, East Providence, Lincoln, Bristol and customers of the Kent County Water Authority.

Under the city's proposed legislation, a new operator of the water system would be allowed to pass on to ratepayers — without regulators' approval — the cost of what it had agreed in the lease to pay Providence. Business groups object to letting an operator pass on those costs unrestrained. 

While Providence is the center of this debate, there are five other multi-town water authorities in Rhode Island that would also be covered by the legislation.

“If the intent is such that the Public Utilities Commission will not have jurisdiction over the portion of rates intended to cover the cost of any merger/acquisition, are there any protections for ratepayers?” asks Rhode Island Public Expenditure Council Executive Director John Simmons.

Providence wants to do what Allentown, Pennsylvania, did in 2011. That year, Allentown’s finances were a lot like Providence’s, said Mike Moore, communications director for Mayor Ray O'Connell. The city, with a $100-million budget, was facing an annual pension contribution that was due to hit $25 million in a few years.

Allentown decided to monetize its city-owned water system, Moore said. In 2013 it signed a 50-year lease with the Lehigh County Authority, a regional public utility that provides water and sewer services.

The authority agreed to pay Allentown $211 million up front, Moore said, and a $500,000 annual royalty starting in 2016. Water rates for Allentown customers were frozen for the first three years, Moore said. For years 4 through 20, the maximum annual rate increase is the inflation rate plus 2.5 percent. In years 21 to 50, it’s the inflation rate plus 2 percent.

In Rhode Island, the Narragansett Bay Commission, which runs sewer systems in 11 municipalities in the northeastern reaches of the state, could be the Lehigh County Authority to Providence’s Allentown. But for now, at least, the commission's chairman, Vincent Mesolella, has been careful not to commit to what it might pay Providence to run the water system.

This isn't the first time Providence has asked the General Assembly to let it monetize the water system. Last year, a proposal that never got out of legislative committee would have created a new regional water authority and allowed the sale of the water system, an idea that met with widespread opposition, even from the Providence City Council.

Elorza said this year's plan has been crafted with those concerns in mind. It would limit any increase in rates for the first five years to the increases granted in the previous five years. When that five-year cap expires, rates — excluding payments to Providence — would be reviewed by the Public Utilities Commission.

Elorza said city officials have addressed ratepayers' worries about increases outside of regulators' control “so that folks need not be concerned. We learned a lot from the process last year.”

But the Public Utilities Commission is concerned. In a letter to the Senate Committee on Environment and Agriculture, Cynthia G. Wilson Frias, the commission’s deputy chief of legal services, said that if the Providence Water Supply Board served only Providence, then city water customers would be paying rates to support a system that benefits them as city taxpayers. But, she said, if the cost of a water board lease is passed on via water rates charged to customers throughout the system, non-Providence ratepayers will be paying for something that benefits only Providence.

“A sale or lease of a regulated public utility, unlike the sale or lease of an unregulated municipal system, would shift taxpayer burden to ratepayers in other municipalities,” Wilson Frias wrote in a separate letter to the Senate Judiciary Committee last week.

That's the complaint from several mayors whose communities are dependent on Providence water: they fear the hundreds of millions of dollars that would go to the Providence pension fund would come from the wallets of their rate-paying residents.

“To balance the Providence pension woes on the ratepayers of North Providence is an injustice for all ratepayers,” said North Providence Mayor Charles Lombardi. “The City of Providence needs to get its own house in order.”

Environmentalists are also troubled. The Audubon Society of Rhode Island, The Conservation Law Foundation and Save The Bay say they like the idea of the Narragansett Bay Commission running the water system, or even merging with the water board, but they don't support exempting payments to Providence from regulators' oversight.

Providence City Council President David Salvatore said he understands that other cities want his city to solve its retirement liability on its own. But he said if the city goes into receivership because of it, it won’t be a Providence-only problem.

If Providence’s finances collapsed under that debt, it would affect municipal credit ratings and borrowing costs across the state, Salvatore said. Providence has nearly 17 percent of the state’s population, and the local economic impact could trigger a statewide recession, he said. The retirement deficit wasn’t caused by other municipalities, he said, but ignoring its implications could hurt the entire state for years.

And if a receiver were appointed to solve a Providence bankruptcy crisis, he said, that official’s decisions would be purely financial, such as leasing out the water board on the basis of who would pay the most for that right, not who would best run the system. 

“This is a statewide issue,” Salvatore said.

Elorza said if the bill doesn’t pass this year, the city will be back.

“Now what is important for us to communicate to the General Assembly is that this is incredibly important to the city and the state,” he said. “We are going to keep coming back every single year until this finally gets passed.”

— jhill@providencejournal.com

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