Municipal Pension Reform May Be Impossible
Friday, November 04, 2011
State intervention to help save drastically underfunded independent municipal pension plans sure sounds good. But is it even legal?
That’s the question that emerged during a hearing on Governor Lincoln Chafee and General Treasurer Gina Raimondo’s plan for nudging reform on independent municipal pension plans (those not included in the state-run Municipal Employee Retirement System, MERS).
That aspect, just one piece of what’s being called “Comprehensive Pension Reform” by Chafee and Raimondo, would require cities and towns that are struggling financially to study just how underfunded their pension plans are, then come up with a plan to fund them, which would require givebacks by public sector unions and their retirees.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTIf the municipalities with low funding ratios of less than 60-percent refuse to study their plans, the state would withhold state aid, and if retirees and current employees refuse to give back benefits, their cost-of-living adjustments (COLA) would be rescinded.
A Legal Question
Whether or not the state has the legal ability to step in and strip the COLA from the retirees remains a significant open question. Were it not for the state’s ability to withdraw the COLA from retirees, the public sector unions would have little incentive, outside of wanting the municipality to avoid bankruptcy, to give back any of their pension benefits they already won in negotiations.
Both Chafee Director of Administration Richard Licht and John Tarantino, a lawyer who defends the state on labor issues, conceded that the municipal pensions are undeniably a contract between the workers and their municipal employers as they were agreed to during collective bargaining.
The state legislature’s powers are plenary—meaning they are only checked by the state and US Constitution. But contracts between entities are protected by the U.S. Constitution (Article 1, section 10).
But Licht and Tarantino, in separate testimonies said that the existence of a contract does not mean the state cannot intervene if the “public good” is at stake.
How Contracts Can Be Declared Invalid
Under the law, there are four general ways in which a contract can be declared invalid. The contract can be declared invalid on the basis of vagueness, if it was deemed unconscionable, if it was agreed to under duress or fraud, or for a public purpose—as the state would argue the case is here.
Licht invoked Central Falls to defend the need, urgency for, and public purpose of municipal pension reform.
“Central Falls has taught us that we need to be serious about pension security,” said Licht, who invoked the bankrupt municipality several times throughout his testimony.
“How can anyone say in the light of Central Falls that there isn’t a public purpose here?”
Tarantino agreed.
“It seems pretty compelling to me that there is a legitimate public purpose for these changes,” he said.
No Case Law
But there is no actual case law pertaining to a state intervening in a pension contract for a municipality. And the standard for proving that a contract is invalid because it violates a public policy is high. An example of a contract being ruled invalid because it runs contrary to the public good would be a non-compete agreement between a doctor and his former practice. It is in the interest of the public to have as many doctors and medical options as possible, therefore, in 1999, the Rhode Island Supreme Court ruled that the contract was unenforceable.
Further complicating the issue is the fact that the state is currently in litigation over whether or not the modest pension reform passed in 2009 is legal. Superior Court Justice Sarah Taft-Carter recently ruled that state legislation governing state employee pensions represents a contract between workers and the state. Yet even if the Supreme Court agrees with Taft-Carter, Licht pointed out, the state will be in the exact same situation as it is with the municipal plans.
Critics say implications of a judicial decision that lets communities go back on their contracts once they reach financial hardship or a budget deficit could be vast—contracts could quickly become inconsequential.
Dire Situation
Regardless of whether or not the state is able to withhold COLAs in municipal plans, the situation is dire. The independent municipal plans are collectively just 40-percent funded, with a liability of $2.1 billion. Mayors Angel Taveras Providence, Allan Fung, of Cranston, and Daniel McKee of Cumberland all said they needed state help and intervention.
Taveras said Providence’s plan is just 34-percent funded, with an unfunded liability of $828 million.
Fung said his city’s plan is just 17-percent funded, and for the city to keep up, it would take a combination of $95 million in additional taxes or budget cuts, or some combination of the two, over a ten-year period.
As always, the issue is, and has been, emotional for all involved.
Scores of firefighters and police officers from across the state crowded into the statehouse, filling the overflow room on the third floor to capacity. The group grumbled whenever Licht defended pension reform.
Still, those in leadership say without state help, municipalities will struggle to meet their obligations in upcoming years, even with huge tax hikes.
“Certainly there have been a lot of promises that have been made to the employees. But the facts are the facts, and the numbers are the numbers,” Fung said.
Editor's Note: The orginal version this story included an incorrect spelling of Providence Mayor Angel Taveras' name.
f you valued this article, please LIKE GoLocalProv.com on Facebook by clicking HERE.
