May 1 (Bloomberg) -- Providence, Rhode Island’s biggest city, will halt cost-of-living increases for retirees among steps to overhaul a $422.8 million pension system and avoid becoming the state’s second municipal bankruptcy.
Less than three months after Mayor Angel Taveras said Providence stood on the “brink of bankruptcy,” the City Council yesterday voted 13-0 for changes that save almost $19 million a year, partly by capping benefits, according to Jake Bissaillon, the council’s staff chief. While Taveras backs the overhaul, Paul Doughty, who leads the local firefighters union, called it “a huge mistake” that will be challenged in court.
“These reforms have overwhelming support from the community, business leaders and the Local 1033 Laborers union,” Taveras said, referring to a municipal workers’ union. In a statement after he signed the measure at City Hall following the council vote, the mayor described the overhaul as “a big step toward the necessary structural changes we must make.”
Rhode Island, which had the ninth-highest jobless rate in the U.S. in February, authorized a similar overhaul of the state pension system last year, suspending cost-of-living increases and raising retirement ages for government workers and teachers. Retiree benefits have been in the spotlight since August when Central Falls, the state’s smallest city, declared bankruptcy after being overwhelmed by pension promises.
Banking on Cuts
Providence is banking on the cuts to help balance its fiscal 2013 budget. Ending cost-of-living increases of as much as 6 percent a year for some retired public-safety workers will save $15.6 million, according to a council report. Taveras said that one former fire chief who earned $63,510 the year he retired collects $196,813 annually now and that there are at least 25 city pensioners whose annual payments top $100,000.
The increases may resume once the retirement system has enough assets to cover 70 percent of promised benefits, according to the measure. Testimony at council hearings on proposed changes put the current funding level at 34 percent.
Another element of the overhaul caps pensions at 1.5-times the state’s median household income, although no savings estimate was provided in the report. The city pension serves 3,000 retirees and another 2,000 current workers, including police and firefighters, said David Ortiz, a Taveras spokesman.
Cutting Unfunded Liability
The overhaul will reduce Providence’s unfunded liability of about $900 million by more than $240 million, according to the council report. The larger figure represents the difference between what the city has set aside to pay for promises to retirees and the estimated cost of those future benefits.
Providence is one of the few municipal governments that has sought to roll back benefits already being paid to retirees or accrued by public workers, said Amy Monahan, a professor at the University of Minnesota Law School. In most cases lawmakers have sought to cut costs by increasing contributions for new workers or renegotiating current contracts, she said.
“Most people would be very hesitant to take action that would interfere with a collectively bargained agreement,” Monahan said. “You typically preserve what has been earned.”
Just as labor groups say they plan to sue the state of Rhode Island, the smallest in the U.S. with about 1.05 million residents, unions in Providence, the capital, said they will challenge the city of about 178,000. Doughty said that Taveras and the council are playing a dangerous game by counting savings from the overhaul to help balance its budget, because changing contracts already in force is illegal.
“It’s a huge mistake,” said Doughty, the firefighter union chief. “If they lose this in court, almost certainly they will end up in bankruptcy. They’re playing a huge game of chicken.”
The average city pensioner gets about $25,000 a year, Doughty said. Rhode Island’s median household income averaged about $54,900 over five years through 2010.
The vote in Providence comes as the Legislature run by Democrats debates a proposal from Governor Lincoln Chafee that would authorize municipalities with poorly funded pension plans to suspend cost-of-living increases. If it becomes law, the measure would strengthen Providence’s argument that it needed to overhaul its system, said Ortiz, the Taveras spokesman.
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