Rhode Island's failed attempt to settle a lawsuit challenging its 2011 pension overhaul law casts uncertainty over the state's finances, according to Moody's Investors Service and Janney Capital Markets.
Superior Court Judge Sarah Taft-Carter, in a preliminary ruling last week dismissing a state motion to dismiss the suit by several public-sector unions and retirees, said "an enforceable implied-in-fact contract [exists] between the plaintiffs and the state."
Deliberations in the lawsuit are scheduled to start Sept. 15, also in Superior Court.
"The development is a credit negative for the state and local governments because it prolongs uncertainty over the timing and cost of resolution of this bellwether pension reform and risks an estimated $400 million in annual pension savings," said Moody's, which rates Rhode Island's general obligation bonds Aa2 with a negative outlook.
According to Moody's, the state's $222 million share of those savings amounts to 6% of its projected fiscal 2016 revenues.
"Local governments' $178 million portion of those savings is significant because it would reduce their projected 2016 pension annual required contribution by 46%," Moody's said.
Fitch Ratings and Standard & Poor's rate Rhode Island AA.
"Increasing uncertainty [is] casting a shadow over not only state finances, but also many local government plans," said Alan Schankel, a managing director at Janney Capital Markets. According to Schankel, the state at the time expected to reduce its unfunded liability from $4.4 billion to $2.7 billion and lower its annual contribution from $305 million to $177 million.
Two weeks ago, the state received another blow when a police union rejected the proposed settlement that Gov. Lincoln Chafee, General Treasurer Gina Raimondo and public sector unions had announced in February.
The compromise, which needed the approval of unions, lawmakers and Taft-Carter, sought to scale back some provisions of the Rhode Island Retirement Security Act, which passed after exhaustive debate and reduced benefits for active employees by shifting them to a hybrid system combining defined-benefit and defined-contribution plans, and limiting cost of living adjustments for retirees, among other changes.
Chafee and Raimondo said in February the compromise proposal would have preserved 95% of the savings.
"While we are disappointed this settlement was not ultimately able to come to fruition, we continue to believe that the pension changes enacted by our General Assembly are constitutional, the state has strong legal arguments to support its positions and will begin to prepare for litigation," Chafee and Raimondo said in a joint statement.
Chafee, a Democrat and former Republican-turned-independent, will not seek re-election. Raimondo is running for governor as a Democrat.
According to Moody's, Rhode Island faces a broad range of possible financial outcomes.
Citing actuarial estimates by the state-run Employee Retirement System of Rhode Island, Moody's said a complete reversal of the changes would result in annual required contributions of $500 million for fiscal 2016, not including additional amortization payments that would be created from the post-legislation lower levels.
At the other extreme, said Moody's, upholding the post-overhaul structure would peg Rhode Island's fiscal 2016 required contributions at $280 million, a savings of about 45%.
