Rhode Island is no stranger to pension problems.
Even after a major state-level overhaul of the Employees’ Retirement System of Rhode Island led by then-R.I. General Treasurer Gina M. Raimondo, municipalities with their own pension systems have struggled to reverse the sometimes decadeslong gap in unfunded liabilities.
And at a time when cutting or freezing retirement benefits offers potential relief from the cash-flow shortages caused by COVID-19, the ability of cities and towns to renegotiate pension plans has been further reduced under a June ruling from the R.I. Supreme Court. The majority opinion written by Chief Justice Paul Suttell addressed a long-standing dispute between the city of Providence and a group of retirees who opted out of a prior settlement agreement.
In siding with these “opt out” retirees, Suttell wrote that the Providence City Council’s 2012 ordinance legislating cost-of-living-adjustment freezes was “an undeniable violation of the doctrine of separation of powers” because the court had already set terms for COLAs under consent judgments or judicially approved settlement agreements from prior pension disputes.
The ruling could spell trouble for Providence, which may have to back pay seven years of up to 6% annual COLA increases for the 70 retirees who opted out of the prior settlement. But it also has consequences for the other municipalities with open pension systems, at least nine of which were in critical condition, according to a 2018 report by the R.I. Office of the General Treasurer.
‘These consent judgments are now almost bulletproof.’
ROBERT G. FLANDERS JR., Whelan, Corrente & Flanders LLP law partner
Robert G. Flanders Jr., a former Supreme Court justice and the court-appointed receiver for Central Falls after the city filed for bankruptcy in 2011, expected other city employees and retirees would now seek to enshrine their agreements with municipal governments through similar, court-ordered decrees.
“These consent judgments are now almost bulletproof,” said Flanders, a partner at Providence-based Whelan, Corrente & Flanders LLP.
On the flip side, municipalities may be more reluctant than ever to enter into consent judgments over pension plans.
“For cities and towns, I would be wary of any consent judgment,” said Angel Taveras, an attorney with international law firm Greenberg Traurig LLP and the former Providence mayor whose administration enacted much of the pension reform at the heart of the lawsuit.
However, avoiding consent agreements may not be an option; when pension disputes rise to the level of court attention, municipalities don’t have much bargaining power to set the terms, said Elizabeth Wiens, an attorney with Gursky/Wiens Attorneys at Law Ltd. in North Kingstown.
Wiens downplayed the legal precedent set by the decision, noting that consent judgments have always been sacrosanct under the principle of powers. But what could be of new importance to retirees, including the many municipal firefighters unions she represents, is the court’s determination regarding the length of time a city can impose restrictions on benefits payments.
The Providence City Council in 2013 froze COLAs with the intent to reinstate them once its pension reached 70% funding. But the state Supreme Court shot that down, noting that more than half of the retirees in the lawsuit would no longer be alive by the time the pension hit that benchmark. The decision has now been remanded to Superior Court to set a more limited time period on COLA freezes.
That’s good news for retirees, said Weins, because even municipalities without consent judgments on their pension plans will face the burden of proving COLA freezes are “reasonable and necessary,” or else face legal challenges.
Local governments subject to seemingly air-tight consent decrees over pension plans have one more weapon in their arsenal: municipal bankruptcy. Flanders said bankruptcy would allow local governments to cut pension benefits even after a court order.
Flanders, who has long advocated for municipal bankruptcy as an option for struggling pension plans, speculated that the recent Supreme Court decision might make the unappealing option more palatable.
Taveras disagreed.
“Bankruptcy should be the very, very last option,” he said, adding that Providence was “nowhere near” the kind of dire financial straits required to merit bankruptcy filing, even factoring in the pandemic.
Providence Mayor Jorge O. Elorza has not specified how the city will pay for what he called the “ballooning pension payments” mandated by the court’s decision. The city and plaintiffs will argue again before the state Superior Court to determine the damages in the case.
“Until that time, it’s impossible to know the full extent of damages the city will have to pay and its impact on long-term finances,” Patricia Socarras, an Elorza spokeswoman, said in an email. “The administration is continuing to look at every option possible, including all of the city’s assets and revenue and will be considering several strategies to sustain those pension payments moving forward.”
Raimondo, who under state law must authorize a municipality’s bankruptcy petition, has previously not expressed support for the idea. Asked about that possibility of bankruptcy after the Supreme Court decision, Audrey Lucas, the governor’s spokeswoman, said the office does not comment on hypothetical situations.
(This story has been updated to reflect that Providence’s back pay of COLA increases is still being negotiated and is dependent on court decisions.)
Nancy Lavin is a PBN staff writer. Contact her at Lavin@PBN.com.