A compromise on pensions may help Rhode Island Gov. Gina Raimondo toward her goal of changing perceptions about the state.

Gov. Gina Raimondo spoke of the need to change perceptions of Rhode Island during her inaugural address in January.

A recent legal compromise over pension benefits could be a step in that direction.

On April 2, Rhode Island Superior Court Judge Sarah Taft-Carter approved a tentative agreement between several public-sector unions and the state over the unions' challenge to the state's 2011 pension overhaul law, which Raimondo championed as the state's general treasurer.

Frank Williams, a retired state Supreme Court justice whom Taft-Carter appointed special master with powers to mediate a deal, brokered the compromise. Williams called the accord "an awesome achievement."

Rhode Island's legislature still must approve the deal. Three unions still oppose it, but Raimondo said unlike the last attempted compromise a year ago, not all groups had to sign off.

"It's always better to have a settlement, especially when you have virtually everybody on board, than to go through the risk of litigation. You want to eliminate that cloud of uncertainty," said municipal restructuring expert James Spiotto, a managing director at Chapman Strategic Advisors LLC in Chicago. "I assume the deal is sensible and affordable and if so, it allows the state and municipalities to plan for the future without that cloud hanging over them."

Rhode Island is home to 19,000-population Central Falls, which reported an $80 million unfunded pension liability when it filed for bankruptcy in August 2013. The city exited 13 months later. While under Chapter 9, it cut employee benefits up to 55%, though some of those cuts have been restored. Its bondholders were paid, in contrast to subsequent municipal bankruptcies elsewhere in the nation.

A final settlement to the 2011 Rhode Island agreement would also remove an element of risk in the eyes of bond rating agencies.

"We still have a ways to go, but this would definitely be a positive for the state if this gets through the legislature," said Fitch Ratings director Eric Kim.

Fitch and Standard & Poor's rate Rhode Island's general obligation bonds AA, the third-highest rating for each. Moody's Investors Service rates them an equivalent Aa2.

Officials estimate the changes could save Rhode Island $4 billion over 20 years.

"Our rating has already incorporated the savings, so we don't anticipate moving the rating," said Kim. "We've acknowledged the risk. This compromise would eliminate a potential negative by removing an element of uncertainty from the table."

According to Raimondo, the settlement preserves about 92% of the savings Rhode Island had projected in February 2014, when she and previous Gov. Lincoln Chafee proposed a compromise. An umbrella municipal police union remains opposed. The other holdouts are the Cranston fire and police unions.

Robert Walsh, executive director of the National Education Association of Rhode Island, said essentially that there was little more to gain should the suit proceed.

"Even a victory scenario would most likely give relief along the lines of a pension settlement, assuming things in Rhode Island and/or with the pension system or financial markets are not worse off after all appeals are done," he said in an internal memo that Providence television station WPRI obtained.

Among other features, the 2011 Rhode Island Retirement Security Act created a hybrid plan merging conventional public defined-benefit pension plans with 401(k)-style defined contribution plans. It was the first such plan to affect current employees.

Tweaks in the final offer included changes to the minimum retirement age, an increase in the defined-benefit pensions available to public employees with service of 20 years or more, and more frequent cost-of-living-adjustment increases for retirees.

"It's certainly good for Raimondo," said Daniel DiSalvo, a City College of New York professor and Manhattan Institute senior fellow. "Throughout her campaign [for governor last fall], she was concerned about the court gutting the legislation.

"I can see others cribbing from the slogans in her 'Truth in Numbers' campaign [in 2011]," said DiSalvo, author of the book "Government Against Itself: Public Union Power and Its Consequences."

Raimondo, in her public hearings, said pension overhaul was about math, not politics. "The reality was that the system was at a breaking point," she said at the time.

The compromise, however, still has opponents within the Ocean State.

The free-market leaning think tank Rhode Island Center for Freedom & Prosperity said the constitutionality of future changes at the state and local levels remains an open question.

"We don't need a backward looking pension deal; we need a forward looking pension ruling on its constitutionality," said the center's chief executive, Mike Stenhouse. "We all know that the 2011 law was just a Band-Aid and that massive reforms are still required at the state level, and especially in municipalities."

Gadfly investor Ted Siedle, founder of Benchmark Financial Services of Ocean Ridge, Fla., and a frequent critic of Raimondo, has launched an effort to crowdfund a forensic investigation of Rhode Island's pension system.

Rhode Island's drama has percolated while unfunded pension liability surged as an overriding issue in public finance. Illinois, California and New Jersey, among others, have been battlegrounds.

In Chicago, home to nearly $20 billion of unfunded obligations, the pension problem was a backdrop to Tuesday's bitterly contested mayoral runoff in which incumbent and former White House chief of staff Rahm Emanuel defeated Cook County Commissioner Jesus "Chuy" Garcia. Chicago faces a roughly $400 million budget gap next year, not even counting a scheduled $550 million annual increase in its required public safety pension contributions.

"The municipal credit analyst community is taking the public pension issue very, very seriously," said Tom Kozlik, a director at Janney Capital Markets. In a Janney survey of 162 municipal bond analysts - not including rating agency analysts -- 86% cited public pensions as the most important issue in the muni bond market.

While not speaking for all credit analysts, Kozlik said he has seen few issuers or political leaders taking pension overhaul seriously. He called the recent spate of issuance of pension obligation bonds worrisome and added that even though bond-rating agencies have started to incorporate pension obligations and a lack of funding into ratings more frequently, they are too optimistic about prospects for meaningful pension change.

The best chance for overhaul, he said, was right after the recession of 2008 and 2009.

"Now, I fear the sweet spot for potential reform has passed - how are political actors supposed to gain concessions when the president is bragging about the economic recovery and news of all-time highs in the equity markets is all over the news?," Kozlik said.

DiSalvo, Spiotto and others maintain that pension obligations are crowding out other basic municipal needs, notably infrastructure.

"So much of public employee compensation is backloaded into retirement in the form of pensions and health care," DiSalvo said in a recent Bond Buyer video.

"We're seeing those tensions play out across the country," he said. "In some sense Detroit was a little bit the canary in the coal mine of this problem, but the way the bankruptcy suit was settled sort of tamped down or mitigated their full effects."

In California, former San Jose Mayor Chuck Reed and former San Diego city council member Carl DeMaio are working on a statewide initiative to put pension overhaul on the ballot in November 2016.

Reed and DeMaio want changes that would save taxpayers money, provide sustainable retirement benefits and end what they called "abusive" pension payouts that have substantially increased contribution requirements for local governments.

Reed and DeMaio estimate that the state's unfunded liability for retiree health care benefits is about $72 billion.

The efforts would put them on another collision course with the state's powerful public employee unions and the $300 billion California Public Employees' Retirement System, the largest public pension fund in the U.S.

In Rhode Island, the pension overhaul bill consumed five hours of debate in 2011 before passing both legislative branches decisively. Earlier this month, Senate President M. Teresa Paiva-Weed and House Speaker Nicholas Mattiello, D-Cranston, said they were pleased over the settlement, but Mattiello's response was more guarded.

"The House of Representatives will conduct its due diligence as part of the legislative process and we have established no timetable at this point," he said.

Taft-Carter, speaking from her Providence courtroom, said the trial could resume in June if settlement implementation fails. Taft-Carter gave both sides until May 18, when she has scheduled a status conference.

State lawmakers and, ultimately Taft-Carter again, must approve the deal. The May 18 deadline does not apply to the General Assembly.

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