Providence Suit Intrigues Municipal, Legal Experts

Providence, R.I.'s lawsuit accusing an actuary of miscalculating city savings on pension benefits reflects the increasing exposure of city advisors and vendor firms to liability, municipal and legal experts say.

"I think this is the first of a wave. Everybody is fair game," Bill Brandt, president and chief executive of Chicago workout firm Development Specialists Inc. and chairman of the Illinois Finance Authority, said Thursday, one day after Rhode Island's capital city sued Buck Consultants LLC in U.S. District Court in Rhode Island.

According to the lawsuit, which alleges breach of contract, breach of fiduciary duty, negligence and violation of Rhode Island's False Claims Act, Buck Consultants misgauged $700,000 of savings Providence had expected to achieve this year by overhauling its pension-benefit plans for retired police officers and firefighters.

"Buck Consultants is not a bad firm, but whatever their liability insurance is, they would probably want to triple it pretty quickly," said Brandt. "It was only a matter of time before various cities took a long, hard look at the coterie of advisors that surround them. It's a sign that the municipal distress business is getting mature."

"This is shining a light on outside vendor relationships. If I were still running a government, I'd ask my controller to take a hard look," said Anthony Figliola, the vice president of Empire Government Strategies in Uniondale, N.Y., and former deputy supervisor of Brookhaven, N.Y.

"There may not have been anything malicious, but there are still potential issues, because someone's got to foot the bill for all of this if there isn't any remedy from the courts."

Providence Mayor Angel Taveras said that when compounded annually over 28 years, the error amounts to $10.8 million in today's dollars. He added that the city would not alter the settlement or seek future concessions from city employees. The city and unions agreed on the concessions in December.

Buck, founded in 1916 and based in New York, has served Providence since 1920. Zerox Corp. bought Buck's parent, Affiliated Computer Services Inc., for $6.4 billion in 2009.

"For more than 90 years, Buck Consultants has valued its longstanding relationship with the City of Providence. Our primary focus has always been to provide solutions to our clients' complex HR and business challenges. However, we have yet to be served with a lawsuit, so it would be inappropriate for us to comment at this time," Buck senior marketing consultant Steven Laird said in a statement.

Providence faced total pension liability of about $1.3 billion and about $900 million in unfunded pension obligations when it began negotiations in mid-2011. "Problems in Providence have been systemic for many, many years. What happens there doesn't surprise me," said Figliola.

The city expected to save $165 million by freezing cost-of-living adjustments, or COLAs, by 10 years. Providence ultimately hashed out an agreement with unions based on Buck calculations "that were later revealed to be erroneous," the lawsuit said.

Court papers cited a series of emails between the city's director of administration, Michael D'Amico, and Buck employees Andy Zmich and Philip Bonanno, in which the city discovered the mistake and Buck admitted it.

"It's a rather prosaic lawsuit," said Anthony Sabino, a Mineola, N.Y., attorney and St. John's University professor.

The suit graphically described a Jan. 3 meeting among D'Amico, Zmich and Bonanno.

"Faced with the gravity of Buck's admitted and inexcusable mistake, Bonanno could barely speak and choked out his words as he asked for a glass of water," the lawsuit said. "Sweat poured down Bonanno's face, and he asked those present to turn down the heat in the room. He struggled to speak and stated that he might pass out. After drinking two large glasses of water and taking several minutes to compose himself, Bonanno, in a classic instance of 'too little, too late,' assured D'Amico that he would review all of Buck's calculations."

Sabino thinks the rhetoric could backfire. "There's a fine line between a bland, boring complaint and a fire-and-brimstone approach. I've thrown a little fire and brimstone myself. But this is napalm. They would have been better served if they toned down the rhetoric and saved it for the jury. Judges don't like rhetoric," he said.

Taveras fought for pension overhaul last year while saying his city was on the brink of bankruptcy. Three weeks ago, he painted a brighter picture of Providence, saying the city hopes to balance its budget by year's end. Providence also received an additional $50 million from nonprofit organizations, including Brown University.

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