Deal on pension cuts heads off high-stakes challenge

BARGAINING CHIP: Cranston Mayor Allan Fung, right, expects the Providence settlement to generate some momentum at the bargaining table. Above, he is pictured with Carlos E. Lopez, director of constituent affairs. / PBN PHOTO/NATALJA KENT
BARGAINING CHIP: Cranston Mayor Allan Fung, right, expects the Providence settlement to generate some momentum at the bargaining table. Above, he is pictured with Carlos E. Lopez, director of constituent affairs. / PBN PHOTO/NATALJA KENT

In early May, Providence Mayor Angel Taveras said retired city workers just didn’t understand the problems their pensions, some with annual 6 percent compounded increases, were causing the city.
They must have gotten the message.
Less than a month later, Taveras announced a landmark, albeit tentative, agreement with retirees and active public employees, on a package of pension and health care cuts projected to save the city millions of dollars and stave off bankruptcy.
The agreement, should it be ratified by the rank and file, will end a high-stakes Superior Court lawsuit over retiree health insurance and head off a threatened legal challenge to the package of pension cuts passed by the city council in April.
What changed in just a few weeks, from the months and years when retirees fought attempts by the city to take back promised benefits, was the implicit threat in Taveras’ message that this time the threat of a Providence bankruptcy was real.
“Nothing has changed in terms of the [benefit cuts] being any more acceptable, but they could be the lesser of two evils,” said Joseph Penza, the Warwick lawyer representing the Providence Retired Police and Firefighters Association. “If they stay with the litigation, the fear was that the city could go into bankruptcy. So we would win the battle and lose the war.”
Penza said had it not been for the threat of a Central Falls-style bankruptcy, where municipal retirees saw their contracts thrown out and pensions cut in half, he wouldn’t recommend any of the 1,100 retirees he represents approve the city’s offer.
The retirees are expected to vote on the proposed settlement in the next week or two, Penza said. If a majority rejects the deal, the Medicare case will head back to court and provisions barring a future legal challenge to pension changes will be lost.
“People say the Capital City will never go bankrupt, but I was one of the people who predicted Central Falls would not go bankrupt,” Penza said. “I saw people in Central Falls forced to sell their homes because of the bankruptcy. “I think we have an excellent case, but at the end of the day if the city files for bankruptcy it changes everything. I think the retirees should at least see the last, best offer the city has.” Beyond Providence, the retirees’ court case challenging the city’s attempt to force those older than 65 off private insurance and into Medicare was watched closely as a legal test of how far governments will be allowed to go in breaking agreements made with employees over benefits. Whatever decision was made by Superior Court Judge Sarah Taft-Carter in the Medicare case, it was expected to be appealed to the state Supreme Court.
A court victory for the retirees would have not only sent a discouraging signal to struggling cities trying to get out from under troubled pension systems, but would have been a warning to the state, which is preparing to defend its sweeping 2011 pension system overhaul in court.
But because the Providence agreement was influenced so strongly by the threat of bankruptcy, it is unclear what impact it will have on pension systems in communities in sounder fiscal shape or on the state, which has hardly been considered a candidate for default.
“I think the circumstances are different because the state cannot claim to be on the verge of bankruptcy,” said Daniel Beardsley Jr., executive director of the Rhode Island League of Cities and Towns. “It can claim the pension system was paying out more than it was taking in and the viability was in jeopardy down the road, but it was not something that was going to take place in 12 to 24 months.”
While it may not have a huge legal impact on the state-level pension battle, Beardsley said the Providence deal should send a clear signal to the handful of other Rhode Island cities with faltering budgets and pension systems.
“I think it should have a dramatic effect because if this settlement proves anything, it’s that unions and retirees can win the battle and lose the war,” Beardsley said. “Central Falls was driving that train. If other communities are going down the same road as Providence, I think it bodes well for the parties to come to an agreement.” Communities falling into that distressed category include Woonsocket, which is now under the control of a state budget commission, Pawtucket and West Warwick.
“This Providence tentative agreement does not directly affect us, but obviously the same types of revisions are likely to arise because there are only so many things you can do,” said Pawtucket Director of Administration Antonio Pires in an email. “It’s likely all of these benefit changes are going to find their way into all of these pension systems.”
The revisions in the Providence deal are highlighted by a 10-year freeze in yearly cost-of-living pension raises and an elimination of all 5 percent and 6 percent compounded increases. Future pensions will be capped at 150 percent of the Rhode Island median income and will be based on the four highest-paying years of service instead of three highest-paying years.
In exchange for these cuts, retirees will get a $1,500 stipend in five years and another $1,500 in eight years if the plan reaches certain benchmarks.
Pawtucket’s pension plan is currently 30 percent funded and Pires said and the city has sent letters to retirees informing them of its critical status and likely changes.
The state pension-reform law passed last fall sets a Nov. 15 deadline for communities with “critical status” pension plans to file reform plans.
Cranston is one of the Rhode Island cities with underfunded pension plans – a $271 million unfunded liability that will cut a $26.5 million chunk out of the city budget next year – but does not face the same imminent bankruptcy threat as other communities.
How unions and retirees will react to pension-reform plans without the threat of default is unclear, but Mayor Allan Fung expects the Providence settlement to generate some momentum at the bargaining table.
“Hopefully this sends a message to retirees elsewhere that we are trying to save the pension plans for them,” Fung said. “Hopefully the retirees see the bad situation many of these plans are in and are ready to come to the table instead of risking litigation.” •

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