Providence breaks $700,000 pension link joining nationwide insolvency fight

ANGEL TAVERAS speaks about his first year as Mayor of Providence, Rhode Island, January 23, 2012.
Posted 5/24/12

BOSTON - It has been more than 20 years since Gilbert McLaughlin ran the fire department in Providence. Yet the former chief stands to be biggest loser as the capital of the smallest U.S. state flirts with insolvency.

McLaughlin, 75, is the highest paid of Providence’s 3,000 retired workers, collecting a $196,813 pension this year, the result of yearly 6 percent cost-of-living increases the city once bestowed on firefighters and police. Lawmakers, facing a $1 billion deficit and squeezed for cash, ended the automatic raises and capped annual payouts.

Now retirees such as Gillie, as he is known, won’t see their pay outs double every 12 years.

“No one ever did the math on this,” Paul Doughty, head of the firefighters union, said in an interview in his office above the bar at the Firefighters Memorial Hall in Providence. “I don’t think anyone had any idea that if Gillie lived to 100, he’d be making $700,000.”

While a Providence official in 1989 warned such giveaways could one day bankrupt the city, the arrangement bought peace with labor unions, a compromise made in town halls and state capitals across the country after stock market gains fattened pension funds. Now lawmakers are trying to rein in benefits.

Since 2009, more than 40 states have lifted retirement ages, cut automatic raises, or increased employee contributions, typically targeting new workers to avoid conflicts with laws or contracts.

Broken Promises

It took the longest recession since World War II and a financial calamity that the U.S. Census Bureau says wiped out 23 percent of public retirement plan assets in 2009 to show how politicians long promised richer benefits without setting aside sufficient funds. The average retirement system in 2011 had about 75 percent of the assets needed to meet commitments, down from about 100 percent in 2000 amid the technology stock boom, according to the Boston College Center for Retirement Research.

“It is an inherently dysfunctional system,” said Steven Malanga, a senior fellow at the Manhattan Institute for Policy Research, a New York-based nonprofit that tries to foster individual responsibility and economic choice.

“It allows politicians to make promises that they will not be responsible for,” Malanga said. “That is why so many perks were granted to workers for political support that did not have an immediate impact on the budget.”

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