In the next chapter in Rhode Island’s ongoing battles about public pension overhauls, the Providence City Council on Monday night is expected to approve sweeping changes to its pension system.
Mayor Angel Taveras said he would sign the measure.
“The current pension system is unsustainable and driving the capital city toward a black hole,” said Taveras, who warned in February about bankruptcy.
On Thursday, the council gave preliminary approval by a 15-to-0 vote to six of seven recommendations by a pension subcommittee. The so-called Providence Pension Protection Plan, expected to reduce an unfunded liability by $236 million, would freeze guaranteed cost-of-living raises until the plan is funded at 70%, and cap future pension benefits.
According to the state’s auditor general, Providence was 34% funded last fall. The savings would help plug the $20 million budget gap.
The legislature last fall enacted a far-reaching overhaul of pensions at the state level. But cities and towns, facing a combined unfunded pension liability of about $2 billion, are looking to restructure the 36 locally administered pension plans.
Gov. Lincoln Chafee last month introduced a bill enabling cities and towns to change their plans, and has trumpeted the plan at town meetings and other appearances. According to Chafee’s office, 21 communities have already passed resolutions supporting the package.
In Providence, a court fight looms, based on comments by the head of the firefighters’ union late Thursday night.
“This road is perilous, because if they lose in court — and they’re certain to get sued — they will automatically end up in bankruptcy and they won’t be able to refund the money they spent on the general fund,” said Paul Doughty, president of the Providence Fire Fighters-IAFF Local 799.
Brian Fraser, a partner with Richards Kibbe & Orbe LLP in New York, said the city has an uphill climb legally. “Obviously that’s a breach of the collective bargaining agreements, so I think they’ll have a hard time supporting that in court,” Fraser said.
Providence already lost in court in February, when Superior Court Judge Sarah Taft-Carter blocked the city from switching public-safety retiree health plans to Medicare. Taveras said the move would have saved Providence $6 million to $8 million annually. The state’s Supreme Court plans to hear an appeal in May.
Providence last month received downgrades to its general obligation bond ratings from Fitch Ratings and Moody’s Investors Service. Fitch lowered it three notches, to BBB from A, and Moody’s revised it to Baa1 from A3.
“Bankruptcy would not be the worst thing for them,” Fraser added. “It worked for Central Falls.”
Central Falls, an 18,000-population city that faced an $80 million pension liability, filed for Chapter 9 protection last August. The filing enabled receiver Robert Flanders to rework pension agreements, with the city and retirees ultimately agreeing on 55% benefit reductions.
Providence, which Moody’s says has $561 million of debt outstanding, is far from alone. Unfunded pension liabilities have become a front-and-center topic among municipal-distress experts.
According to Vijay Kapoor, a senior managing consultant at Philadelphia-based municipal finance advisor PFM Group, workforce costs consume 65% to 85% of a city’s operating budget.
“I’ve noticed, particularly in Rhode Island, a bigger recognition of the severity of the problem. The emphasis has gone from 'How big is the problem,’ to 'What do we do about it?’ ” said Kapoor, whose firm opened an office in Providence late last year with an eye on pension consulting.
According to Kapoor, municipalities must “really be open with the numbers and show how the economic situation has impacted the city. Don’t point the fingers. The numbers are the numbers.”
His colleague, Dean Kaplan, concurred.
“Some cities are overburdened. They need a road map to intelligently understand the situation. You have to focus on the numbers,” said Kaplan, a PFM director who is a former management-side labor attorney and budget director for Philadelphia. Kaplan has served as a state-appointed overseer for Pittsburgh, New Castle and Reading, Pa.
“In many cases, the current administration is not the one that settled the first agreement or made the first pension change,” Kaplan added. Taveras, in fact, is serving his initial term, winning election in 2010 after serving for three years as a Providence housing court judge. Earlier, he ran unsuccessfully for Congress.
John Filan, vice president of consulting firm Development Specialists Inc., emphasized both sides reaching a middle ground. “A lot of employees and labor organizations recognize that the pension issue is not going away,” he said. “You have concessions and contributions on one side, but concerns about security and certainty on the other.”
Both Filan and Kaplan emphasized the need for multi-year plans. “A lot of governments do that, but largely internally and with the rating agencies,” Filan said. “The more the books are open, the better. You can present an economic outlook and get everyone on the same page.”
When Taveras introduced his $638.4 million budget earlier last week, he emphasized not only pensions but also the need to obtain more money from nonprofit institutions, notably the Ivy League’s Brown University.
Taveras’ budget assumes $7.1 million in lieu of taxes. As leverage, the mayor has threatened to push a bill through the legislature requiring nonprofits to pay 25% of what their tax bill would be.
While the mayor and Johnson & Wales University recently negotiated an agreement that will at least triple the school’s contribution to Providence’s coffers to nearly $1 million, talks with Brown have been more prickly. The university now pays more than $4 million to the city and Taveras wants more. The mayor is also in discussions with Lifespan, a health care system provider affiliated with Brown’s Warren Alpert Medical School.
Repeated comments by Brown president Ruth Simmons have struck some city officials as elitist.
“Universities have become, in many ways, the most successful sector in society,” Simmons said, according to the Brown Daily News. “I don’t think it’s reasonable for the city, having made mistakes and having become insolvent because of those mistakes, to turn to institutions that are successful and to demand that they pay for those mistakes.”
Simmons will retire effective July 1. Princeton University dean Christina Paxson will succeed her.
“It seems to me that it’s merely a stop-gap,” Fraser said of the city’s efforts to raise money from nonprofits. “Providence has a problem that’s structural and the additional revenue from the nonprofits is not nearly enough.”