I hope you are enjoying Mother’s Day. This week’s letter will discuss Senate Finance Committee hearings on (1) the State’s coronavirus response, and (2) the City’s request for State approval to issue a pension obligation bond.
1. The State’s Response to COVID-19
Last Tuesday night (May 3), the Senate Finance Committee reviewed the budget for the Department of Health, which included a proposed expenditure of $150 million of the federal ARPA funds for the ongoing response to the pandemic. Of this amount, $50 million would be allocated to hospitals to help address increased labor and equipment costs caused by the pandemic, while the remaining $100 million would pay for anticipated State costs for such elements of the response as testing, contact tracing, protective equipment, emergency response supports and a vaccine campaign.
For the first two years of the pandemic, the federal government (including the Federal Emergency Management Agency, or FEMA) reimbursed the State for many of these costs; however, the Department has begun a transition it expects to continue in the future, resulting in the budgeting of $50 million in known future response costs and $50 million as a contingency available to spend for future outbreaks should they occur. Under federal guidelines, the State must return to the federal government any ARPA funds that are not spent within the next four years; therefore, the State will review the contingency budget periodically and redirect those funds to other permitted uses should they not be necessary to respond to the pandemic. The ARPA budget also includes $50 million to defray the extra costs hospitals have occurred during the pandemic. While these allocations will reduce the amount of ARPA funding for “once in a generation” transformative investments, I support the administration’s conclusion that the first priority for those federal funds is to help Rhode Island address the direct impacts of COVID-19.
In recent months, the Department ended the prior practice of providing testing for symptom-free Rhode Islanders. As a result, the daily case counts published by the Department of Health understate the spread of the disease, even as Rhode Island’s case counts per capita are at or near the top of the national data. This change has increased the percentage of positive tests, which the Department recently decided not to report. Because of this change, we have lost some of our best data for measuring the spread of the virus in our State. I asked the Department about whether we can use wastewater data to measure the spread, but they said that tool has not yet been sufficiently developed. Instead, the Department pointed to stable hospitalization levels and the availability of therapeutic medicine as a basis for concluding that asymptomatic testing was no longer necessary.
2. The Pension Obligation Bond
On Thursday, May 5 the Senate Finance Committee heard a presentation from Providence officials concerning the request for permission to issue a pension obligation bond in the amount of $515 million. As I discussed in my February 6 letter, this proposal could stabilize the future increases of the City’s cost in paying off its pension debt. The proposal has four preconditions to its implementation. In addition to General Assembly approval, the proposal depends upon approval by Providence voters at a June 7 referendum and by the City Council. The final precondition may prove to be the most difficult, namely the existence of favorable financial markets. In order for the pension obligation bond to provide the City with financial relief, there must be a sufficient “spread” between the cost of borrowing and the expected return from the investment of the borrowed funds. The City has specified that the bond will not go to market if the available price (interest rate on the bonds) exceeds 5%; however, in testimony before the Senate Finance Committee, the City’s representatives further stated that if the available price comes close to 5%, the risks could exceed the expected benefits. Given the recent rise in interest rates, we may go through this approval process but lack the ability to go forward at this time. With that said, if the City obtains the other approvals, they will create a window of time in which to act, allowing for a future bond if interest rates return to a level below the maximum allowable threshold after exceeding it.