Rhode Island's announcement of a potential settlement of lawsuits challenging a 2011 landmark pension overhaul law is a positive development, said Fitch Ratings.

"The [agreement] will increase costs for the state and participating local governments, but the vast majority of the Rhode Island Retirement Security Act savings appear to be intact," Fitch, which rates Rhode Island's general obligation bonds AA, said in a Feb. 19 statement.

Five days earlier, Rhode Island Gov. Lincoln Chafee, General Treasurer Gina Raimondo and other state officials and labor leaders announced a settlement, following month of talks overseen by the Federal Mediation and Conciliation Service. Public-sector unions had challenged the constitutionality of the state's landmark 2011 pension overhaul law. The state's retirement board approved the plan earlier on Feb. 14.

The settlement, which unions, lawmakers and state Superior Court Judge Sarah Taft-Carter must approve, restores a defined-benefit plan for employees with at least 20 years' service, drops the retirement age to 65 from 67 and increases the frequency of cost-of-living adjustments, or COLAs.

Based on actuarial data provided as part of the settlement announcement, Fitch calculates the deal preserves 94.3% of the combined total reduction in unfunded actuarial accrued liability originally achieved through the 2011 law for Rhode Island and participating local governments, and increases the liability 4.8% to $5 billion.

After union approval, the politically explosive measure would go to the state legislature.

"Fitch views positively the certainty provided if the [agreement] is approved by all parties and the litigation ends," the rating company said.

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