A willingness to talk and a sense of urgency prompted Providence and three major unions to agree on pension and health care benefit reductions, according to financial observers.
Mayor Angel Taveras late Wednesday announced a tentative accord that — if all parties approve it — would avoid prolonged legal battles and keep the state capital out of bankruptcy court, a fate that struck fellow Rhode Island city Central Falls last year.
Taveras last year compared his city’s finances to a Category 5 hurricane. On Wednesday, he said the compromise, if approved, would save about $18 million annually — $14 million and $4 million, respectively, from pension and health care cuts. “Barring anything else, this will put [bankruptcy] out to sea and keep it out there,” Taveras said in an interview.
“It’s an important step forward, although they didn’t have much of a choice,” said Michael Riccards, executive director of the Hall Institute of Public Policy in Trenton, N.J. “The financial conditions there are pretty terrible.”
Highlighting the complex pension agreement is the suspension of all cost-of-living adjustments, or COLAs, for 10 years, though families of city employees killed in the line of duty will be exempt, and 5% and 6% compounded COLAs are permanently eliminated. Providence last month passed pension cuts that would have suspended COLAs indefinitely.
In fiscal 2023, COLAs will be reinstated only for retirees with less than 150% of the state median income — now $82,353 — or less than the salary of an incumbent employee of the same rank as the retiree at the time of retirement — whichever is lower.
In health care, retirees 65 and older will move to Medicare, an action that state Superior Court Judge Sarah Taft-Carter ruled in February the city could not take on its own.
The City Council, the three major Providence unions — police, fire and Laborers’ International Union Local 1033 — and Taft-Carter must approve the deal. Retirees, whom unions do not represent, are expected to form a class similar to class-action plaintiffs, to vote on the proposal.
The deal would supplement Taveras’ other major accomplishment this year, securing increased payments in lieu of taxes from nonprofit institutions including Brown University.
“What’s different in Rhode Island is that they’re having a conversation. That’s just laudable. In a state that’s Democratic and with a Democratic mayor — and it’s not a tea-party Republican governor they have there — they’ve put a lot of the anger and vituperative talk aside,” said Natalie Cohen, a managing director at Wells Fargo Securities LLC. “I don’t know the mayor and his approach, but it seems as though he made clear that the future of the city was at stake.”
So, too, is the city’s standing in the capital markets. “We expect a positive response, assuming it’s approved,” Taveras said in an interview Wednesday night.
All three major bond rating agencies downgraded Providence’s GO debt this spring. Standard & Poor’s earlier this month dropped it to BBB from BBB-plus, while in March, Fitch Ratings lowered it to BBB from A, and Moody’s Investors Service revised it to Baa1 from A3 after twice lowering it last year.
“There will be a lot of questions from the rating agencies and details we’ll have to provide,” Taveras said. “But if you look at Moody’s and what they’ve been saying, and even Standard & Poor’s — concerns about legal challenges — they’ll get the sense that we’re serious about structural changes.”
One Fitch analyst on Thursday called the development a positive for the city. “Litigation with the unions and retirees could have been long, contentious and costly,” director Kevin Dolan said.
Providence also had precedent. Last year, Rhode Island passed legislation overhauling pension plans for its state-level employees. Gov. Lincoln Chafee, an independent and former Republican, is promoting a bill to enable municipalities to make similar adjustments.
Jonathan Henes, a restructuring partner with Kirkland & Ellis LLP, said last year’s state law that protected bondholders in a bankruptcy filing — and essentially set up Central Falls for Chapter 9 — helped move the Providence talks along.
“That must have played a hand in getting them to the table,” he said.
The city expects to reduce its unfunded pension liability by as much as $170 million through the agreement. According to new data from the state’s revenue office, Providence, with a population of 178,000, has a 32.3% pension funding level, placing it “in critical status.”
The negotiations took four months.
“This is not an easy agreement,” Taveras said. “It was not like everyone left the table and said, 'We’re all set here.’ Suspending COLAs for 10 years was difficult. Eliminating 5% and 6% was difficult. But people looked at the bigger picture.”
Riccards cited the difficulty, and in some cases unwillingness, of accurately projecting pension calculations. “Most municipalities are overscoring how much yield they get from their investments, because they don’t want to face the consequences,” he said.
Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, said publicity about pension amounts in Rhode Island may have tilted public sentiment in that state toward Taveras. “When people saw the fire battalion chief getting $180 grand or whatever, then the public sentiment was probably for reforms.”
