Rhode Island two months ago overhauled its public employee pension system, but its work is far from over.
The new law only applies to the state-run pensions. Help at the municipal level is unfinished. Cities and towns, facing a combined unfunded pension liability of about $2 billion and looking to restructure the 36 locally administered pension plans, will lobby state lawmakers for enabling legislation.
The General Assembly reconvened Tuesday.
Hovering ominously over the state is a December report by Moody’s Investors Service that said its local governments face heightened credit pressure and possibly more downgrades.
“Every city and town is living day by day. Several communities are in difficult financial straits. Moody’s gave us a very stern warning about what we may face if challenges are not met,” said Cranston Mayor Allan Fung, a vice president of the Rhode Island League of Cities and Towns and chairman of its legislative committee.
Central Falls, which has a population of 19,000 and is under receivership, filed for Chapter 9 bankruptcy protection last August, citing an $80 million unfunded pension liability.
East Providence, just placed under a budget review commission, is in the second step of state intervention.
On Thursday, Gov. Lincoln Chafee will host a meeting in Providence of mayors and city managers of the state’s 39 municipalities. Pensions figure to top the agenda.
Local officials say the ability to cut pensions is necessary to keep from raising taxes and sharply cutting services.
The pension bill Chafee signed in November creates a hybrid plan that merges conventional public defined-benefit pension plans with 401(k)-style plans.
The new law also includes a suspension of cost-of-living adjustment increases for retirees until plans are replenished, and raises the retirement age for employees not yet eligible for retirement.
Chafee and General Treasurer Gina Raimondo said the measure will help save the state billions of dollars.
“It was just a first step toward getting Rhode Island’s fiscal house in order. As I said at the time, that legislation doesn’t address the whole problem,” said Chafee, a former mayor of Warwick.
Lawmakers last year stopped short of passing enabling legislation for localities, citing the many nuances of local plans. In addition, municipal pension plans are subject to collective bargaining, which adds legal complexity.
“We’re not asking for the state to come in and provide a cure-all. We’re looking for the legal grounds and the tools to do our jobs,” said Pawtucket Mayor Donald Grebien, who took office a year ago.
Pawtucket, whose collective bargaining agreements with five unions expire in June, has a $138 million pension shortfall, according to Grebien, while its fire and police funded ratio is at 30%. The mayor estimates that local changes, if they parallel the state’s package, could help reduce the unfunded pension liability in his city by about $30 million.
Pawtucket, which borders Central Falls, received a four-notch downgrade from Moody’s in January to Baa2 from A1, leaving it still at an investment-grade level. Three weeks ago, Fitch Ratings revised its outlook on the city’s general obligation bonds to stable from negative, while affirming a BBB-minus rating.
According to Grebien, Pawtucket embarked on a five-year plan that has whittled a $12 million deficit down to $2 million.
“Each community’s bond rating affects the state’s,” he said.
Cranston was not among the nine Rhode Island cities that Moody’s downgraded in 2011. But Fung still called pensions “a very dire problem” for his city.
Cranston’s unfunded pension liability stands at $256 million, slightly exceeding his city’s annual budget of $245 million. Its funding ratio for fire and police retirees, according to Fung, is roughly 17%.
Fung, who served on Raimondo’s 12-member pension overhaul advisory panel last year, expects further pushback from public sector unions.
“Yes, a promise is a promise. Central Falls kept its promises — all the way to bankruptcy court,” he said.
An auditor general’s report in September said 24 local pension plans spread across 17 municipalities were “at risk,” all with funded ratios of less than 75%.
Eighteen plans measured in at less than 50%.
Moody’s rates the state’s general obligation bonds Aa2, while Fitch and Standard & Poor’s each assign a AA.