Providence Would be Devastated if Courts Block Pension Reform
Thursday, May 03, 2012
The capital city will find itself back on the brink of bankruptcy if efforts to slash its unfunded pension liability by more than $236 million are overturned in court, a scenario that could put all retirees and city residents at risk, several Council members and economists said Wednesday.
The warnings came after Robert Jarvis, the President of the Providence Retired Police and Firefighter Association (PRPA), claimed the city rejected his group’s offer to save the city $7.5 million annually by eliminating five and six percent cost-of-living adjustments (COLAs) for just under 600 retirees and by settling a lawsuit that would place retirees over 65 on Medicare.
“The pension reform ordinance passed by the Providence City Council and signed by the Mayor this week is imperative to righting the city's financial ship,” said City Councilman David Salvatore, who is credited with leading the way on the city’s reform efforts. “If it is not fully implemented for any reason, then the fiscal health of the City, including its residents, employees and retirees, is in jeopardy. This new ordinance represents comprehensive pension reform that is in the best interest of everyone.”
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On Wednesday, Jarvis called the city’s attempt to balance its “fiscal mismanagement” on public safety retirees a “betrayal” and suggested that the only way to settle the dispute is in court. Jarvis claims his group offered the city a plan that would have suspended COLAs for several years and then reinstated the increases at a significantly lower rate.
“Because the city has rejected our nearly $8 million dollar offer and the City Council has passed legislation to eliminate COLAs, we have no choice but to take our fight back to court,” Jarvis said. “The PRPFA does not want to return to years of litigation, but the city once again has left us no choice. Instead of making the difficult decision to take our offer, the city and the City Council did what past administrations have done – kick the can down the road for the next administration to try and solve.”
But several sources close to City Hall called Jarvis’ savings claims “pure fiction” and said the group never came back to the table with a new offer after the city rejected a plan that would have saved less than $6 million of the between $16 million and $20 million it needed. One source said the proposal involved only freezing COLAs for three years and would have required future retirees to wait until age 60 to begin receiving a COLA. The source noted that the PRPFA is not in a position to negotiate for current city employees.
The pension reform ordinance passed and signed by Mayor Angel Taveras Monday requires all COLAs to be suspended until the pension system is 70 percent funded and caps all future pensions at one-and-a-half times the median state household income. The ordinance also makes changes to disability pensions and eliminates elected official pensions.
The reforms begin July 1.
A “Statesemic” Risk
But with a lawsuit inevitable, Providence should have had a contingency plan in place to deal the possibility of the ordinance being overturned so that bankruptcy is not the only option, according to Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island.
Mazze said he believes different budget scenarios should have been evaluated. For example, he said, the Mayor should have requested budget submissions with different percentage decreases to determine the impact of cuts of various amounts on education, health, safety and welfare services for Providence residents and businesses.
“One of the immediate consequences of losing the lawsuit would be a lower bond/credit rating when raising funds in the financial markets,” Mazze said. “This could also affect the city's ability to attract and retain businesses. Another consequence is that residents and businesses could expect tax increases and new fees to raise revenues. Also, business and consumer confidence will be negatively affected which may result in a double-dip recession for Providence and Rhode Island.”
Standard & Poor’s this week became the third major ratings agency to downgrade the city’s credit, citing Providence’s “structurally imbalanced” budget. URI economist Dr. Leonard Lardaro said the entire state could face an uncertain future if the city’s pension changes are overturned.
“If the courts overturn the pension reforms, then the fiscal viability of Providence becomes more questionable, leading to further bond rating downgrades and moving the city closer to the edge,” Lardaro said. “And, if Providence should ever end up in bankruptcy, this will bode very badly for other RI municipalities and for the state as a whole. Think of this as ‘statesemic’ risk, our version of systemic risk.”
Solomon: Reform is Critical
On Wednesday, the capital city received praise from the pro-pension reform group EngageRI, which praised the efforts of the City Council and Mayor Taveras, saying, “we believe that the new ordinance constitutes a comprehensive approach to reform because it preserves Providence’s pension system while ensuring that the burden of reform falls equally on employees, retirees and Providence taxpayers.”
But Mazze warned that plans should be in place to deal with the “negative results” that could stem from public pension lawsuits. He said a bankruptcy could encourage other cities and towns to follow Providence's lead if they were to lose their lawsuits
“If there are no (alternate) plans, we need to elect new leaders,” Mazze said.
Providence City Council President Michael Solomon echoed the concerns of his colleagues, the Mayor’s office and the financial experts. He called pension reform “critical” to the city and warned that the city’s future depends on the reforms signed into law this week.
“Comprehensive pension reform is critical to the future of this great city, its residents, it employees, and its retirees,” Solomon said. “The changes approved unanimously by the Council and signed by the Mayor result in a more sustainable system and City. Providence's future will once again be in peril if these savings cannot be achieved.”
Dan McGowan can be reached at [email protected]
