Fallout from an arbitration ruling that Warwick, Rhode Island, must stop using its two-tiered pension system for firefighters is “a cautionary tale on both sides,” said pension expert James Spiotto.
“I think it is important for governments, state and local, and especially if we’re moving toward an economic downturn, handle the issue regarding pension systems in an effective way,” said Spiotto, a managing director at Chapman Strategic Advisors LLC in Chicago.
The American Arbitration Association on March 18 said the lower pension tier the city created in 2011 violated the collective bargaining agreement between the city and the firefighters' union.
Moody’s Investors Service called the ruling a credit negative for A1-rated Warwick because it will increase pension liabilities and raise the cost of annual pension benefit accruals, the so-called normal cost, associated with the city’s firefighters' pension plan.
Mayor Joseph Solomon said the ruling could set his city back at least $2.6 million, pending an actuarial analysis.
Under its 2011 pension overhaul, Warwick unilaterally moved firefighters hired after July 1, 2012, into a lower pension benefit level, called Tier II, without the required union consent. The arbitration panel is requiring the city to halt the two-tiered system and make whole the 45 firefighters shifted into Tier II by providing benefits in line with the more generous Tier I.
Spiotto urged municipalities and unions to negotiate within reason.
“Aristotle once defined virtue as mostly in the golden mean,” he said. “With pensions, if you take the attitude that I’ll try to get everything I can, you’ll get into trouble. If on the other hand, you want to do anything to take benefits away, you’ll get into trouble, too.”
Assuming the entire award is implemented as an increase to the city's actuarial accrued liability, Warwick's fiscal 2017 adjusted net pension liability of $991 million will rise to $995 million, according to Moody’s.
Moody’s said the ANPL increase is larger than the reported liability increase because it uses a discount rate based on a high-grade corporate bond index, which in this instance is lower than the reported discount rate.
“The increased burden will be manageable in isolation, but the increase will add to Warwick's ANPL, which at 3.2 times operating revenue in fiscal 2017 is heavy compared with nation and statewide pension burden medians for cities at 1.6 times and 1.8 times revenue, respectively,” Moody’s said.
Warwick's contribution rates for the Fire II plan were below Moody’s “tread water” indicator even before the ruling, which according to Moody’s means the annual government contributions were not enough to prevent reported net pension liabilities from rising based on the plan's actuarial assumptions.
Unlike the firefighters, the bargaining units for police and Warwick's other employees agreed to the two-tiered system in their collective bargaining agreements, according to Moody's.
“Despite its significant long-term liabilities, Warwick’s financial position and credit profile have improved in recent years, supported by a multiyear trend of positive operating performance and a large tax base,” Moody’s said.
