Pension Reform

Raimondo pension lawsuit seen risking bankruptcies

BLOOMBERG FILE PHOTO/SCOTT EELLS
RHODE ISLAND Treasurer Gina Raimondo championed an overhaul last year of one of the nation’s worst- funded public pensions, setting out a road map for states and cities by curbing benefits and delaying retirements.
Posted 7/27/12

NEW YORK - Rhode Island Treasurer Gina Raimondo championed an overhaul last year of one of the nation’s worst- funded public pensions, setting out a road map for states and cities by curbing benefits and delaying retirements.

Now the revamp, which took effect this month, is facing a legal challenge from unions. If successful, the lawsuit could produce fiscal “devastation” by spurring more municipal bankruptcies in a state already on the verge of falling back into recession, according to Raimondo, a 41-year-old Democrat.

While the court action may take months or years, it’s being closely watched as it may provide guidance in other states where similar legal battles have arisen, said Amy Monahan, who teaches law at the University of Minnesota in Minneapolis. Rhode Island is also unusual because, unlike in California, where court rulings have sided with labor to protect benefits, there is little precedent to guide the outcome, she said.

“Other state courts will watch because they’d love to come up with a way to address this area that makes sense,” Monahan said, calling it “a compelling case.”

“Rhode Island has it all: a poorly funded plan and really widespread changes,” she said.

$4.6 trillion gap

The law provided “a dramatic punctuation” to efforts by U.S. state and local governments seeking to control retiree costs as pension-plan losses drained assets, said Ronald Snell, a senior fellow at the National Conference of State Legislatures in Denver. Estimates of the collective unfunded liability run as high as $4.6 trillion.

Cuts affecting public workers have been made in more than 40 states since the financial crisis, typically targeting newly hired employees because of legal or contractual restraints, according to the legislatures group.

In Rhode Island, five unions representing state and municipal workers, teachers, firefighters and police claim that the law violates their constitutional rights by breaking contracts and taking away benefits earned by retirees and workers. The groups also say Raimondo manufactured a crisis by lowering pension investment-return assumptions, increasing unfunded liabilities and forcing lawmakers to back the cuts.

“Gina Raimondo, who I am personally fond of, did a phenomenal job of equating the unfunded pension liability as if it were a weapon of mass destruction,” said Robert Walsh, the executive director of the National Education Association of Rhode Island, the teachers’ union that has sued. “The political tide was unstoppable once that connection was made.”

National attention

Raimondo gained celebrity status by engineering the overhaul. She was featured in Time magazine, and earned awards and recognition from public-policy groups. She rose in voter surveys, becoming Rhode Island’s most-popular politician. The accolades reflected both her willingness as a political neophyte to buck her party and take on unions as well as her success in winning passage for far-reaching pension changes.

By delaying retirement, suspending cost-of-living increases and offering workers 401(k)-type savings plans, Rhode Island cut its pension obligations by $3 billion, to $4.3 billion, and lowered the state’s required annual contribution by $275 million, to $414 million. In 2007, the system was judged by Bloomberg Rankings to be the least funded of any state, with 54 percent of assets needed to cover projected liabilities.

“She deserves credit along with others,” said David Walker, president of the Comeback America Initiative, a nonprofit public-policy group in Bridgeport, Connecticut. “She had the courage to campaign on the need for pension reform and to make tough choices, even in the face of significant union opposition.”

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