Moody’s: Huge uncertainty for RI with no pension deal

A chart comparing the cost of Rhode Island's pension system in the 2015-16 fiscal year if the 2011 pension law is upheld in court versus if it gets thrown out. (chart: Moody's Investors Services)

PROVIDENCE, R.I. (WPRI) – A top Wall Street ratings agency is ringing an alarm bell over the recent rejection of a proposed pension settlement that Gov. Lincoln Chafee and Treasurer Gina Raimondo had hammered out with the state’s labor unions.

In a Monday note to investors, Moody’s Investors Service analysts Marcia Van Wagner and Vito Galluccio said the collapse of the settlement after it was voted down by active police union members increases the possibility of a big jump in pension costs for Rhode Island taxpayers, even as the state’s economy remains weak.

“The development is a credit negative for the state and local governments because it prolongs uncertainty over the timing and cost of resolution of this bellwether pension reform and risks an estimated $400 million in annual pension savings,” they wrote.

In Moody’s terminology, a “credit negative” is a development that could hurt the ability of a borrower – such as the state – to maintain or improve its bond rating, which in turns affects the interest rates the borrower pays. By contrast, Moody’s had labeled the proposed pension settlement a “credit positive” for the state.

The new Moody’s analysis zeroed in on the “quite broad” range of possible outcomes depending on how a trial over the constitutionality of the 2011 law ends. The state’s required pension contribution for 2015-16 could be anywhere from $280 million if the law is upheld to $500 million if it’s thrown out entirely, they said.

The “range in projected annual state costs between the most favorable legal outcomes to the most unfavorable poses a considerable risk,” they wrote. “Rhode Island is challenged by narrow liquidity and sluggish economic growth, and faces increasing competition from Massachusetts for critical gaming revenues.”

“An unfavorable court decision will result in extremely difficult budgetary choices and considerable credit pressure,” they continued. A $500-million tab for pensions would eat up about 14% of Rhode Island’s projected $3.55 billion in state revenue for the 2015-16 budget year, according to Moody’s.

“In either case, annual costs would continue to rise after 2016,” they noted.

Van Wagner and Galluccio also said the worst-case scenario of a total loss in court would add $178 million to the pension costs of Rhode Island’s municipal governments, and warned “financially stressed” cities such as Woonsocket and Providence would be “further challenged to absorb additional expenses” if that happened.

The General Assembly passed the pension overhaul in November 2011, shaving the state’s unfunded liability for pensions by roughly $4 billion through a freeze on promised cost-of-living adjustments (COLAs) and other changes. Unions sued to overturn the law the following June, and R.I. Superior Court Judge Sarah Taft-Carter ordered both sides into closed-door mediation later that year.

After more than a year of secret talks, on Feb. 14 state and union leaders unveiled a settlement to end the litigation over the pension law in exchange for a roughly 5% increase in the state’s unfunded liability for benefits. But the deal collapsed this month after the police voted it down.

A Rhode Island Superior Court trial over the law’s constitutionality is now scheduled to begin on Sept. 15, and the case is expected to eventually reach the Rhode Island Supreme Court.

Robert Walsh, executive director of the National Education Association Rhode Island teachers’ union, said Friday he expects the legal process over the pension law will take three to five years unless a new settlement is reached.

“I’m disappointed,” Walsh said during a taping of WPRI 12’s Newsmakers. “I was hoping we’d move forward to the second round of voting and to the legislative process and get this resolved once and for all.” He said the terms of the settlement would have put an additional $10 million a year into retirees’ pockets immediately.

Walsh also speculated that if his side is successful, the Rhode Island Supreme Court could eventually restore full benefits to retirees and workers for the period from passage of the law in 2011 to the day the decision is rendered while ordering the General Assembly to craft “more reasonable” pension changes going forward; alternatively, he said, the high court might send the case back to Superior Court to work it out.

“I thought the finality of a settlement made sense,” Walsh said. “If the state had offered us to go forward on a standalone basis [after the police vote] I would have recommended to my executive committee that we do that. If the General Assembly took the [settlement] legislation that was crafted and passed it right now – today – I would recommend to our executive committee that we not pursue further litigation.”

“I was satisfied that the deal balanced a lot of competing interests,” he added. “That said, I’m going to look for more than that in court.”

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

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