Coventry, R.I. officials say they have no obligation to replenish an employee pension fund should it go broke, but state officials question that assertion.
Rhode Island’s Pension Study Commission has summoned them for a meeting.
According to state revenue director Rosemary Booth Gallogly, Coventry’s plan for non-teacher school employees is on track to run out of cash by 2025. That plan is only 30% funded, with an unfunded liability of $24 million.
Rhode Island’s pension overhaul law of 2011 requires communities with locally administered pension plans in “critical status” – less than 60% funded – to submit funding improvement plans to the state.
“We’re not saying that’s healthy. We’re saying that’s a starting point, and definitely better than 30%,” Gallogly said in an interview. “We want them to be 60% within 20 years and fully funded in no more than 30 years.”
Washington think tank Pew Center on the States considers 80% an acceptable threshold.
Coventry’s Town Council passed a resolution in December saying that neither the town nor its school committee are liable for the underfunding, a position Town Manager Thomas Hoover supports. Hoover did not return a call seeking comment.
Officials from the 35,000-population town 16 miles southwest of Providence say they only must deposit 12.75% of payroll, according to a 1977 contract, and not the amount required annually to adequately fund benefits.
Gallogly chairs the commission, which has scheduled a special meeting for 6 p.m. Thursday at the state Department of Administration building in Providence. The 15-member panel, an outgrowth of the pension law, includes General Treasurer Gina Raimondo, Auditor General Dennis Hoyle and mayors Angel Taveras and Allan Fung of Providence and Cranston, respectively.
According to Gallogly, Coventry is the first Rhode Island community to try to disavow legal responsibility for underfunding.
“It is unique but it’s not unresolvable. We’re trying to work with them. I think they look at this as a legal issue but some of us see it as a moral issue,” she said.
“They’re treating it as a defined-contribution plan when it’s set up as a defined-benefit plan,” Gallogly said.
“We’re not asking them to fund the ARC [annually required contribution], but they should at least negotiate the benefit. Do something,” Gallogly said.
A Coventry-type case could provide an interesting legal test. Some legal experts, notably in Illinois three years ago, have argued that pension funds, not the sponsoring government, own pension benefits and that the government is not a guarantor of pension fund obligations.
“It’s all over the lot, and one of the reasons is that state laws have a lot to do about it. It’s never been dealt with head-on,” said John McLaughlin, a labor-and -employment partner at Ballard Spahr LLP in Philadelphia.
“In Pennsylvania, I don’t think Coventry could get away with the argument they’re trying to make,” he said. “As I said, though, it’s uncharted waters.”
Moody’s Investors Service, which lowered Coventry’s general obligation rating to A1 from Aa3 in September 2011, said in March that continued underfunding of Coventry’s pension ARC could push the rating further down. Moody’s downgraded eight Rhode Island communities in 2011, largely citing pension liabilities.
According to Gallogly, a compliant Coventry could qualify for aid under Gov. Lincoln Chafee’s municipal incentive aid program, should Chafee’s proposed $10 million fund pass the legislature. The governor crafted the program to help communities with pension costs.