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Vote no on pension obligation bond

The sky is falling!

Oh, no! The City of Providence is in trouble … or shortly will be in trouble … probably … because of the Cianci-era pensions with rapacious cost of living adjustments (COLA).

We’ve seen fliers and been to meetings where we are told, 'Bankruptcy is not an option!' The subtext being that bankruptcy is likely unless…

And then we’re presented with a savior in the form of a $500-million pension obligation bond.

But we have to hurry, ('buy now!') because interest rates are rising … it may already be too late! (And if we don’t vote in favor then no one will ever lend us money at a good interest rate ever again!)

I’m voting no. No no no.

Not only is the pension obligation bond a fast-talking shell game, it doesn’t even make financial sense.

Here’s why:

• The pension obligation bond will not solve the pension crisis. It covers less than half of the existing unfunded obligation. (Only about 40%.)

• The only way this works is if the money stays in the investment account. (More about that in a moment.)

• Imagine buying a house with the requirement that you have to borrow 100% of the money, and keep it in a bank account at all times, even though you’ll only owe your mortgage payments.

• The belief that the pension fund needs to be 100% funded is false. Even with the current 26%, the income and interest exceed the expenses to the pensioners.

• Yes, the COLAs have been on hold and expenses will rise. The administration hasn’t kept it secret exactly how much is owed to how many people.

• The numbers bandied around are seductive but optimistic, 'We’re borrowing at 5% interest, but we’ll be collecting 7% interest from investments on Wall Street. That’s a 2% profit!'

• If the stock market tanks, we won’t be collecting 7% interest, but we’ll still owe 5% on half a billion dollars.

• By the way, over the 30-year period of the bond, the interest will add up to … half a billion dollars.

• Even if the stock market doesn’t tank (and tanking is anything less than a 5% return), if the bond money is actually used to pay pensions, then it won’t be invested and won’t collect any interest.

• Let me repeat and explain that: as soon as we spend $150 million on pensions, the 7% investment income will be lower than the 5% interest owed.

• After that, we’ll be paying the interest and principal with tax dollars.

• Meanwhile, no one can say (or will say) how many people are going to benefit from the pensions, nor how old they are.

• We’re going to borrow half a billion dollars to pay off half a billion dollars at the cost of half a billion dollars.

• Finally, the pension obligation bond itself will be immune to any bankruptcy that comes later. That means we’re going to owe the bond holders the money no matter what happens.

The proposed pension obligation bond is like not refinancing a mortgage at a lower rate. At the end of a mortgage, you own a house.

At the end of this Ponzi scheme, the City of Providence will own nothing. Will have built nothing. And will still be in the hole to pensioners.

Don’t sit out this election. Vote no on #1. I am.

Mark Binder is an author and a political activist. He lives in Providence.

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