State is banking on courts to uphold pension reforms
2012 is shaping up to be a most financially challenging year for a number of our struggling cities and towns. That’s because, despite monetary pension relief provided by the reform legislation passed last fall, budgets at the local level are severely strained by the loss of state aid that’s occurred over the past few years and the weight of their independent and woefully underfunded pension plans that were beyond General Treasurer Gina Raimondo’s reach. Several municipalities are in trouble already, requiring state intervention measures, and others will probably make the news as 2012 unfolds.
First was the implosion of Central Falls, which required a takeover by the state and the imposition of a receiver; more recently the financial plague has struck East Providence and Woonsocket. Both cities have seen their credit ratings reduced to junk bond status in just the past two weeks. (Woonsocket almost didn’t meet its school payroll the last week of December and required an early state aid payment to be able to do so.) And Providence, which made heroic strides to reduce its $100 million operating deficit under Mayor Angel Taveras, still hasn’t closed its deficit gap entirely. North Providence, Pawtucket and Johnston have been operating on thin financial ice for some time now.
Anticipating these problems, last year the General Assembly passed enabling legislation that sets in motion three state intervention steps – financial overseer, financial commission, and receiver – when a municipality falls into severe financial trouble and bond ratings drop. That’s what we’ve been seeing as the state appointed a receiver for Central Falls, with full powers over city government, and then in turn an overseer followed by a financial commission in East Providence, with powers limited to financial matters.
East Providence has been on the ropes in recent years, battered by its high labor costs, and the city witnessed a controversial move by its former school committee to unilaterally void the terms of its teachers contract during a time when the contract had expired, forcing pay cuts and imposing health care premiums on teachers for the first time. The school committee, backed by the mayor and city council, took such a move under the cover of pleading severe financial conditions that it claimed threatened city bankruptcy. In court the East Providence Teachers Union lost its case, as the judge affirmed the city’s right to save itself under such threatening circumstances. That case has now moved to a higher court.
In the meantime, labor influence in the last election brought down the city government incumbents and installed labor-friendly replacements. Now those incumbents find themselves in much the same sinking boat as their predecessors, with each side blaming the other for the situation at hand. What’s different this time around is that the state has intervened to manage and re-order the city’s finances.
A major driver in these municipal financial problems is the sorry state of most of their independent pension plans – plans outside the state-run Municipal Employees Retirement System (MERS). Many of these plans (there are some 35 of them statewide) are seriously underfunded, and the affected cities and towns do not have the money available to boost the funding levels anytime soon.
However, because those plans are protected by collective bargaining agreements at the local level, Gina Raimondo and the General Assembly declined to add them to the pension reform legislation. Instead, there is new state guidance for reform contained in that legislation, which several mayors have declared is inadequate to the dire situation they are facing.
They have asked for more immediate relief in the form of authorizing the suspension of the COLA payments required of them, just as was ordered in the state legislation, and Governor Chafee and Treasurer Raimondo have indicated that they will urge the General Assembly to address these plans and their COLAs in the new session, now under way. At the same time, the state should also provide relief in the form of making certain state imposed – but unfunded – mandates optional.
Of course, any such potential relief by the General Assembly on authorizing the suspension of local plan COLAs will be vigorously opposed by labor and will end up in court, along with the state pension reform law. So be it. The state is banking on prevailing in a court fight, even if it goes all the way to the U.S. Supreme Court, as it may.