PROVIDENCE – Amid the financial hardships posed by COVID-19, the city has been hit with a new expense: up to seven years of cost-of-living adjustments for the group of retirees who opted out of a prior settlement agreement over pension reforms.
In a series of three opinions issued on Tuesday, the R.I. Supreme Court sided with the former city employees who have continued to fight the city’s 2012 pension reform, contesting the suspension of COLAs enacted to curb the damage by a projected $110 million structural deficit.
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Chief Justice Paul Suttell wrote in the opinion that the 2012 city ordinance that froze COLAs until the pension fund reached 70% was unconstitutional, ordering the city to pay back the COLAs – some up to 6% annually – owed to the retirees since 2013.
While the price tag is unclear, it will likely have severe consequences for a cash-strapped city already dealing with a significantly underfunded pension and obligations exceeding $1 billion, among other costs. “This decision will force the City to make very difficult decisions about how to pay for ballooning pension payments at the risk of short-changing critical needs like public education, social services and infrastructure investments,” Mayor Jorge O. Elorza said in a statement.
Elorza was not available for further comment on exactly how the city will meet these pension payments, including whether bankruptcy is on the table. In a 2016 interview with Providence Business News, Elorza dismissed the possibility of the city filing for bankruptcy as “barroom talk” though he has since framed it as a last-resort solution if no alternatives are found.
While bankruptcy is often seen as a “four-letter word” associated with failure by city leadership, it may be an opportunity to hit the refresh button on longstanding financial woes, said Robert Flanders, a former Supreme Court justice and the court-appointed receiver for Central Falls after the city filed for bankruptcy in 2011.
Flanders said he could not comment on the implications of the court ruling for the city, since he did not know details of the city’s finances, but agreed the cost would be “burdensome.”
If the city is unable to pay what the court ruled it owes to retirees – or negotiate new terms with the plaintiffs on its own – bankruptcy offers an “effective” option to relieve the city of its debt obligations, Flanders said.
Asked what alternatives to bankruptcy the city could use to meet these new obligations, Flanders named raising taxes, issuing bonds or increased borrowing – all “unpalatable options” with “negative consequences,” he said.
Samuel D. Zurier, a lawyer and former city councilman, offered a different viewpoint.
Zurier, who helped write a 2018 report on the city’s pension system during his time on the council, reiterated the report’s finding that “the cure for bankruptcy is probably worse than the disease triggered by the petition.”
Zurier named tax hikes and a negative perception by businesses looking to relocate as examples of the unfavorable consequences of bankruptcy.
Moreover, the city is unlikely to meet the criteria for bankruptcy, even with the new financial burden imposed by the court ruling, according to Zurier. Typically a municipality must prove insolvency to qualify for bankruptcy, while the city has more than $367 million in its pension fund, according to an actuarial valuation as of 2018.
Zurier encouraged city leaders to use their term-limited status – Elorza and several city council members cannot run again – to “make difficult decisions to help the city through this,” naming a decrease in the city’s payouts to employees and retirees as an unpopular but effective decision that could ease the pension crisis.
Under state law, the governor must sign off on a municipality’s petition to file for bankruptcy; Gov. Gina M. Raimondo has in previous interviews expressed reluctance to authorize bankruptcy. A request for comment in light of the Tuesday court ruling was not immediately returned.
