The challenge to Rhode Island's pension overhaul law, for now, is in the hands of an independent federal agency.

Judge Sarah Taft-Carter of Rhode Island Superior Court earlier this month referred the case, in which five public sector unions are challenging the Rhode Island Retirement Security Act of 2011, to the Federal Mediation and Conciliation Service.

The Federal Mediation and Conciliation Service evolved from the Taft-Hartley Act of 1947 to quickly handle labor disagreements while minimizing disruption on commerce.

Legal arguments in the case pivot around whether benefits established through state law constitute a contract. Judge Taft-Carter, in rejecting a motion a year ago by the state to block the lawsuit by unions, called the retirement system essentially "an implied contract" between the state and its employees.

"We have 49 sovereign states and a few territories all looking at what happens in Rhode Island," said workout pro Bill Brandt, president and chief executive of Chicago-based Development Specialists Inc. and chairman of the Illinois Finance Authority.

University of Minnesota professor and pension expert Amy Monahan has said that contract provisions aside, states retain "police power." The U.S. Supreme Court has ruled that a court must establish that a contract impairment under that premise is reasonable and necessary to serve an important public purpose, including an economic problem.

"It is important to keep in mind, however, that there is no objective test that is used to determine whether a state may validly exercise its police power. Rather, it is always a fact-intensive, case-by-case inquiry," Monahan said in a policy brief she co-authored late last year.

While Rhode Island, the nation's smallest state, has generated big headlines nationally, it may not provide the ultimate test case, according to Brandt.

"Rhode Island's constitution is not as severe — in other words, there is no constitutional prohibition against altering a pension plan," said Brandt. "People like David Boies are stepping in and taking credit, but the facts in Rhode Island are not as crystal clear. If I were a betting man, the ultimate test will come elsewhere, in some big industrial state, like Illinois or Pennsylvania."

Boies, a New York lawyer noted for his representation of then-Vice President Al Gore in his unsuccessful court fight to win Florida in the 2000 presidential election against George W. Bush, is part of Rhode Island's legal team.

Rhode Island's far-reaching law, which took effect July 1, created a hybrid plan merging conventional public defined-benefit pension plans with 401(k)-style plans. It also included a suspension of cost-of-living adjustment increases for retirees and raises the retirement age for employees not yet eligible for retirement.

Officials estimated the new law would enable Rhode Island to trim its $7 billion unfunded pension liability by roughly $3 billion over 20 years. They also say the move will save cities and towns $1 billion over the next two decades.

The example set by the law also helped Rhode Island's bankrupt city, 19,000-population Central Falls, rework its pension plan for retired police officers and firefighters while under Chapter 9. That city exited bankruptcy in September and received upgrades from Moody's Investors Service and Standard & Poor's to B2 and BB, respectively.

Capital city Providence also reworked its pension plan for police and firefighter unions, with Moody's calling that development a credit positive.

Eight Rhode Island cities received downgrades from Moody's in 2011, with pensions oft-cited.

The Federal Mediation and Conciliation Service has been active in noteworthy labor disputes, including those involving professional sports leagues. Recently it was in talks with the National Hockey League and its players association. The league is now involved in a lockout that could force cancellation of the entire 2012-13 season.

FMCS director George Cohen had previously participated in discussions pertaining to the National Basketball Association and National Football League lockouts.

"The sports groups are seeking this kind of mediation because it is normal in the labor process and usually a needed precursor to bringing an unfair labor practice claim before the National Labor Relations Board," said Bob Boland, a sports management professor at New York University's Tisch Center for Hospitality, Tourism and Sports Management.

"But this kind of mediation is not always successful or even binding," Boland said.

"When the baseball players and the steelmakers talk of mediation, that's where they come from," Brandt said. "These guys know what they're doing, although I don't know whether this case lends itself entirely to mediation."

Shortly after Taft-Carter ordered mediation, the FMCS invoked silence.

"Rhode Island Superior Court Associate Justice Sarah Taft-Carter has ordered and the parties have agreed to mediation under the auspices of FMCS. Due to the sensitivity of this high-profile dispute and consistent with the agency's longstanding practice, we will have no further comment on the schedule, location, or substance of this mediation," the agency said in a boilerplate statement that matched, nearly verbatim, what it said about East Coast ports' and Pacific Northwest grain handlers labor negotiations.

Taft-Carter, the daughter of former Cranston Mayor James Taft, has withstood efforts to remove her from the case. The judge, her mother, son and uncle are all part of the state pension system, but she won't recuse herself, saying her neutrality isn't compromised.

Brandt said the fear of large and embarrassing defeats send cases like Rhode Island's into mediation.

"People are putting cases into mediation that shouldn't go there, because by using mediation, they won't come away utterly unhappy," he said. "If states lose a case like this, union heads are emboldened everywhere."

Players in the Rhode Island drama include independent Gov. Lincoln Chafee and General Treasurer Gina Raimondo, a Democrat who championed pension overhaul in 2011.

Chafee, who admitted in an interview with The Bond Buyer at the state capitol in Providence last August that losing in court could cost his state "hundreds of millions" of dollars, favored the mediation.

"It is common practice and a wise approach for settlement discussions to be held while litigation is proceeding," Chafee said shortly after Taft-Carter ordered the talks.

"While the state has a strong case, a strong case does not guarantee a win," he said. "A negotiated settlement that is satisfactory to both sides could be in the best financial interest of the Rhode Island taxpayers. Such an outcome would be a favorable alternative to costly, uncertain litigation and — worst of all — the fiscal calamity of a potential loss in court."

Raimondo, who some observers say might oppose Chafee in a run for the governor's office in 2014, said the state should stand firm.

"We should litigate that case forcefully. The law is on our side and we have a very good case," Raimondo said three weeks ago at The Bond Buyer's annual Deal of the Year awards banquet in New York, where she received the Freda Johnson Award honoring trailblazing women issuers.

Her statement following Taft-Carter's most recent order was more tempered.

"I have great respect for the judicial system and it is important to let this process unfold in an orderly and transparent way. We owe that to the people of Rhode Island and to our public employees," she said. "We continue to believe the state has a very strong case and a terrific legal team. As I have consistently said, we will participate in court-ordered mediation in good faith."

Raimondo's push for pension overhaul made her a national figure.

"The essence of mediation is compromise and conciliation so that nobody gets run over, as opposed to putting tire tracks on somebody's backs. If Rhode Island does that to get a deal, it will water down some of her victories, absolutely," said Brandt.

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