Providence, R.I., Mayor Angel Taveras wasn’t taking any victory laps, despite the upbeat tone of last week’s announcement of a tentative landmark deal with major unions in Rhode Island’s capital city to reduce pension and health care benefits.

He still has his work cut out for him, and not just because the deal still needs final approval. “We have to do everything to convince a lot of people that Providence is an investment worth making,” Taveras said in an interview.

Given the multiple downgrades Providence has received from the three major rating agencies over the last two years, Wednesday’s news that it could save an estimated $18 million annually in pension and health-care costs combined — and maybe stay out of bankruptcy court — provided much-needed financial and morale boosts.

Highlights of the labor agreement include suspending cost-of-living agreements, or COLAs, for 10 years, the elimination of 5% and 6% compounded COLAs and moving the health plans of retirees 65 and older to Medicare, an action that state Superior Court Judge Sarah Taft-Carter invalidated in February because the city had acted unilaterally.

The City Council, the police, fire and Local 1033 unions, and Taft-Carter must sign off on it.

Paul Doughty, the head of the city’s firefighters union, said some members were “pretty skeptical,” but added: “For a lot of reasons, the deal’s probably a better way to go, as bitter as it was to swallow.”

In addition to the tentative pension deal, Taveras also has negotiated concessions from nonprofit organizations, including a $31.5 million, 10-year commitment from Brown University, in his battle to rescue the city from the fiscal abyss.

Providence, however, is still looking at a $22.5 million deficit for this fiscal year, despite Taveras having whittled it down from $110 million.

“They have to show evidence of balanced operations and a budget that seems reasonable without any one-time fixes. And, the agreement has to come to fruition,” said director Kevin Dolan of Fitch Ratings, which in March dropped the city’s general obligation rating three notches, to BBB from A.

“They have made significant cuts the last two years, and they’re still operating on a lean budget. It’s still an issue,” Dolan added. “The question is, can they maintain a balanced budget? State funding has been cut, there is pressure on the school system and they have capital needs.”

Taveras agreed. “The work of a mayor is never done,” he said. “We have to focus on economic development. The state has the second-worst unemployment rate in the nation. We have to improve our education, improve our infrastructure and make our streets safe.”

Still, Rhode Island is winning praise for merely getting its warring factions together, period, and recognizing the urgency of the problem.

“Rhode Island continues to be the poster child for actually dealing with its pension and antitrust issues,” said Jonathan Henes, a restructuring lawyer with Kirkland & Ellis LLP in New York.

“At the county, state and local level, we have a massive pension time bomb,” he said. “In so many cities — look at San Jose [in California] and New York City, for instance — the current pension plan is unsustainable.”

Bankruptcy enabled one Rhode Island community, Central Falls, to rework its pension obligations last year. There, state-appointed receiver Robert Flanders achieved a 55% reduction in pension costs after he directed the city to file for Chapter 9 bankruptcy.

On Friday, Gov. Lincoln Chafee named John McJennett to replace Flanders in Central Falls. While McJennett’s appointment was immediate, Flanders will assist the transition during an overlap period.

Since 2003, McJennett has been president of Adams Hill Consulting Inc., which he founded nine years earlier

The receiver’s office on Monday will file the city’s preliminary five-year plan of debt adjustment, with Central Falls looking to emerge from bankruptcy by late summer or early fall.

Flanders briefly advised Providence while serving as Central Falls receiver, but Taveras dropped Flanders as an advisor in mid-April after the retired state Supreme Court justice said the city could not avoid bankruptcy.

According to Henes, the state law passed in 2011 that gave bondholders priority in Chapter 9 filings helped provide the needed flexibility of using the threat of bankruptcy to get unions to rework pension agreements.

“If the city goes into bankruptcy, the retirees could end up with substantially less than what is being offered today,” said Joseph Penza, the attorney for the Providence Retired Police and Firefighters Association.

Meanwhile, the association’s president, Robert Jarvis, accused Taveras of “jumping the gun” by informing the media first.

Suspending and capping COLAs is hardly novel. “Elsewhere, we’ve seen the freezing of COLAs in state and local plans and putting retirees into Medicare, so neither one is precedent-setting,” said Amy Laskey, a Fitch managing director.

One provision of the Providence agreement, though, jumped out at Janney Capital Markets managing director Alan Schankel.

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.

“One and a half times — I’m sure it’s happened in other places, but I’ve never seen it,” Schankel said. “That’s interesting, although I don’t know how meaningful that is in dollars. The big thing is the money savings in the COLAs.”

At the State House in Providence, Chafee applauded the news, after a blistering two weeks that featured the 38 Studios fiasco and Woonsocket’s latest woes.

The demise of former Boston Red Sox pitcher Curt Schilling’s 38 Studios video-game company, for which the Rhode Island Economic Development Commission issued a $75 million loan guarantee funded by a bond sale and backed by Rhode Island’s moral obligation, triggered the resignation of three EDC board members, including chairman Keith Stokes.

Chafee last week nominated Marcia Blount, Pablo Rodriguez and Alison Vareika to replace them, subject to Senate confirmation.

Fitch on Thursday dropped another troubled Rhode Island city, Woonsocket, two notches to B from BB-minus, one day after the governor appointed a budget committee to oversee that city’s finances.

Chafee himself has been lobbying throughout Rhode Island on behalf of legislation that would enable cities and towns to rework pension agreements, akin to what the state did last year with its own workers and retirees.

Providence could serve as a model, and not only in Rhode Island, according to Schankel.

“It’s definitely going to be a reference point in other national situations,” he said. “Yes, I think it could have some precedent. A city administrator, mayor or whoever is running the show will put it on the table and say, 'Look, this is what workers in Providence agreed to.’ You have to give to get.”

Taveras would happily play the leader.

“Assuming this is approved, this is a pathway to follow and hopefully we can serve as a blueprint. We’re willing to help others in any way we can,” he said.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.