Header, the Administration of the Honorable Lincoln C. Almond
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  2002 Signature
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March 8, 2002


I am transmitting to the Secretary of Scale, with my signature, 2002-S-2082, Substitute A, As Amended, "An Act Authorizing the City of Woonsocket to Finance the Unfunded Pension Liability of the City of Woonsocket, by the Issuance of not More Than $90,000,000 Bonds Therefor."

This bill authorizes the City of Woonsocket to finance its unfunded police and firefighter pension plan liability by the issuance of not more than $90,000,000 in local bonds to be paid over no more than 40 years, subject 10 voter approval at a special election.

Last year, I vetoed a bill that would have allowed Woonsocket and Cranston to issue pension obligation bonds (known as "POBs"). In that veto, I detailed prudent safeguards that I believed should be contained in any municipal FOB framework and committed to work with the General Assembly to produce a bill applicable statewide.

This year, my Administration has done considerable work on an omnibus bill that we believe provides a reasonable framework and taxpayer protections for the issuance of municipal POBs should local officials and the voting public believe such debt is in the best interests of a given municipality. The safeguards on the Woonsocket bill, as ultimately amended as recommended by my budget office, are substantially similar to those contained in my omnibus bill.

First, Woonsocket has provided for a referendum on its plan as well as a public hearing to inform the voters of its potential benefits and risks before a referendum. Second, the Woonsocket system is closed, that is, it can add no new members to increase potentially its pension liability. Third, the bill requires that all bond proceeds, after costs and limited capitalized interest, be deposited directly into the city's pension plan. As such, it does not allow an ill-advised scoop of bond proceeds as a quick fix 10 a short term budget problem, a scoop that the taxpayers would then have to pay back with interest over decades. Fourth, this bill contains strictures concerning investment of the bond proceeds pursuant to an asset allocation plan, and mandates that any new unfunded liability - whether created by underperforming investments, increased benefits or any other cause - must be cured by the city by annual appropriations over not more than five years. Finally, the bill prohibits withdrawal of funds from the plan for any reason other than payment of benefits.

It is vitally important in my view that any FOB bill provide municipal taxpayers -who would be responsible for payment of the debt - with the right to approve or reject the issuance of the bonds. Under our state Constitution, all general obligation state debt must be approved statewide at a general election. Under section 45-12-19 of the Rhode Island General Laws, municipal charier, and/or past legislative practice, all long term local general obligation debt has to be approved by municipal voters at a general election or special local election. Considering the nature of FOB debt and its considerable size, bypassing voter approval would be bad public policy. While I would prefer a general election, Woonsocket will conduct a public hearing and inform the voters of its plan before the special election.

Pension obligation bonds can be viewed as a means of replacing one liability with another. The estimated unfunded liability of the pension system at the rime of issuance is replaced or reduced by the debt service payable on the bonds. This method of financing has been viewed as a way of reducing overall cost to the taxpayers by taking advantage of the difference between the rates at which the issuer sells the taxable debt and the long term investment return on the proceeds received. The success of POBs lies in both the execution of the debt transaction and continued diligence on the investment of the assets. Therefore, it is critical that any community issuing POBs acts prudently in executing such a long term financing plan.

It will be up to Woonsocket - should its voters approve the POBs - to invest prudently the bond proceeds within the safeguards provided in this bill.

While I still urge approval of the Administration's omnibus bill, because this bill is substantially similar in most all important respects - and recognizes the right of local voters to approve or reject pension obligation bonding - I sign this bill into law with my signature.


Lincoln Almond