Rhode Island came out ahead in the proposed settlement to union-backed lawsuits challenging the state's landmark 2011 pension overhaul law, capital markets professionals and other observers said.
Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, called the accord a credit positive. He said the deal, assuming unions, state lawmakers and the judge that ordered mediation talks sign off on it, would provide finality while allowing state officials to keep 95% of their expected savings.
"It's not a huge reduction in the benefit to the state. The numbers are not what they were originally, but that's offset by the certainty of the situation," said Schankel. "It's modestly less beneficial, but it does not diminish the positive elements. Assuming legislative approval, it looks like a pretty good deal for Rhode Island. The unions are on board for some pretty significant changes."
State officials project Rhode Island's unfunded liability, which dropped to $4.8 billion from $8 billion in 2011, would only climb to $5.1 billion under the settlement.
"That $8 billion figure was horrendous," said St. John's University law professor Anthony Sabino. "$5 billion is no fun, either, but it's a big improvement."
The capital markets reacted favorably in 2011 to Rhode Island's attempt to cope with one of most glaring unfunded liabilities in the pension sphere, which has become a white-hot issue in public finance nationally.
Moody's Investors Service reported earlier this month that the unfunded liabilities of the four largest public pension plans soared to $174 billion in 2012 from $34 billion in 2003, and to 135% of covered payroll from 33% during that time.
Bond ratings of states such as Illinois and Pennsylvania have fluctuated based on willingness — or lack of it — to cope with pension funding gaps.
Pension overhaul is also a political football in Rhode Island. State General Treasurer Gina Raimondo, who championed the 2011 law, is running as a Democrat in an open-seat race for governor. Gov. Lincoln Chafee, an independent-turned-Democrat, will not run again.
Democrat Angel Taveras and Republican Allan Fung, the mayors of Providence and Cranston, are also running for governor. Both worked out pension-reduction agreements with their local unions.
On Friday, Chafee, Raimondo and other state officials and labor leaders released details of a settlement that followed months of mediation after Rhode Island Superior Court Judge Sarah Taft-Carter ordered talks. The Federal Mediation and Conciliation Service moderated the talks.
"The mediator cannot impose a resolution," said Richard Licht, the state director of administration. "It can only help the parties find a common goal."
The settlement leans in favor of older employees. It 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.
While the COLA will remain suspended until the system is 80% funded, intermittent COLAs would be issued every four years instead of five. The COLA is still paid on the first $25,000 base but with a new formula that considers investment returns and the consumer price index.
Employees with 20 or more years remain on more of a defined benefit system, but younger employees would be moved into a hybrid system that merges a conventional plan with a 401(k)-style plan that is prevalent in the private sector. The original law had sought to move everyone into the hybrid system.
"That's a huge change if everyone under 20 years can go to a hybrid system," said Schankel.
Moody's rates Rhode Island's general obligation bonds Aa2, while Fitch Ratings and Standard & Poor's rate them AA.
According to Sabino, both the state and the unions avoided years of drawn-out, costly litigation. "The settlement reflects an agreement that was mutually acceptable for both sides, and that's a very good result," he said.
The process, though, is far from over. The rank-and-file and leadership of several unions must agree to the proposal. So must Taft-Carter. Then, the necessary approval from the General Assembly, especially in a state election year, would be difficult.
Some House and Senate members have been reluctant to reconsider such a political hot potato as pensions, especially after having endured a wrenching process in 2011.
Monday's joint statement from Senate President M. Teresa Paiva-Weed, D-Newport, and House Speaker Gordon Fox, D-Providence, reflected a see-how-the-wind-blows stance. They said they would await the votes taken by union and non-union workers and speak with their legislative colleagues.
"We are still carefully reviewing the proposed pension settlement," they said. "There is a long road ahead of us and the release of the details of the settlement, which we were not party to, is just a first step."