RI pension law still in legal jeopardy, 3 years later

The Rhode Island State House in Providence.

PROVIDENCE, R.I. (WPRI) – Three years ago today, Gov. Lincoln Chafee signed what remains the most sweeping overhaul of a state pension system ever seen in the U.S., saving taxpayers billions but angering many government workers and retirees in the process.

Three years later Chafee is set to leave office after a single term, to be succeeded by the architect of the pension overhaul, General Treasurer and Gov.-elect Gina Raimondo. But a suit challenging the law is still in pretrial limbo, and there’s now growing momentum in favor of reaching a deal to resolve the issue once and for all.

Talk of a pension settlement may come as a surprise, considering a previous attempt to craft one collapsed in April when a small group of police officers voted to scuttle it. Yet state and union leaders are keenly aware that with so much money at stake – roughly $4 billion, or nearly half the state’s annual budget – the way they resolve the pension battle is one of the most consequential policy questions facing Rhode Island today.

Raimondo – who initially resisted efforts to mediate, but ended up supporting the failed settlement after a judge ordered talks – suggested Monday she remains open to settling but only if she can preserve the lion’s share of the savings from the original 2011 law. The previous settlement reduced the state’s pension shortfall by $3.86 billion, about 94% of the $4.09 billion the law saved.

“As I have said numerous times, I supported the settlement agreement,” Raimondo told WPRI.com in a statement. “I would like to see that back on the table and enacted to put the lawsuits behind us. I am open to making that happen.”

But Raimondo added: “What I am not interested in is going backwards from what was agreed upon in the settlement.” The state is already projecting a budget deficit of nearly $200 million next year; it would be more than twice as high if the old pension system were still in place.

Other RI leaders open to settlement

Seth Magaziner – the Democrat newly elected to succeed Raimondo as treasurer, who will therefore become a lead defendant in the pension suit – has long backed seeking a deal.

“I continue to be supportive of renewing settlement talks, and am hopeful that a resolution can be reached that will keep the retirement system on a secure footing and avoid lengthy and expensive litigation,” Magaziner told WPRI.com in a statement Monday.

Legislative leaders are also open to the possibility.

House Speaker Nicholas Mattiello and Senate President M. Teresa Paiva Weed have both signaled in recent days they want to reduce or eliminate taxes on retirement income, such as Social Security and pension benefits – a new perk for older residents that could help smooth the way for settling the pension suit.

“The speaker will work with all parties to help facilitate a settlement of the pension lawsuit that is in the best interests of the citizens of our state,” Larry Berman, a spokesman for Mattiello, told WPRI.com in an email Monday.

Paiva Weed spokesman Greg Pare sounded a similar note. “The Senate worked closely with Treasurer Raimondo to develop the Rhode Island Retirement Security Act, and will continue to work with her as governor,” Pare told WPRI.com in an email Monday.

“It would certainly be in the best interest of the state and retirees to bring finality, if possible,” Pare said. “The Senate would welcome the opportunity to bring fiscal certainty to current and past employees and the state, while addressing issues raised by cities and towns in any future settlement.”

The renewed settlement discussion comes after years of rancorous debate over how the Ocean State should handle retirement benefits for those who work in state and local government, and how state leaders should deal with benefits promised long ago without money set aside to pay for them.

Overhaul slashed shortfall by 46%

Rhode Island’s state pension system was created in 1936, and it had already been in trouble for decades when Raimondo took office in 2011. One of her first acts was to convince the State Retirement Board, which she chairs, to lower the pension fund’s long-term forecast for its investment returns from 8.25% a year to 7.5%.

That reduced how much the pension system projected its investments would earn going forward, and thus ballooned the size of the pension shortfall – as well as the amount of taxpayer money needed in each year’s state budget to keep the system healthy, which alarmed state leaders.

During a special legislative session in the fall of 2011, the General Assembly enacted a huge overhaul of the system largely designed by Raimondo and her aides. The changes included freezing pensioners’ annual cost-of-living increases and moving most active employees into a hybrid system that partly resembles a private-sector 401k plan.

The various changes slashed the state’s unfunded liability for pension benefits from $8.9 billion to $4.8 billion, boosting its funded level from roughly 42% to 56% as of June 30, 2013, according to the most recent analysis by Gabriel, Roeder, Smith & Co., the state’s actuary. It lowered the size of the taxpayer payment for pensions in next year’s 2015-16 state budget from $501 million to $280 million, a 45% reduction.

The redesigned retirement system has won praise from outside experts. A study released last spring by the Urban Institute, a nonpartisan Washington think tank, gave Rhode Island’s new system grades of “A” or “B” in almost every area except its funding level, which has risen but remains low.

“We gave the new hybrid plan high marks, because it allows younger workers to accumulate pension benefits, doesn’t lock in mid-career workers, and doesn’t penalize older workers,” Richard Johnson, a senior fellow at the institute and director of its program on retirement policy, told WPRI.com in an email. “In terms of plan design (which excludes the funding score), it ranks among the top 15 plans in the country.”

A related study by the Urban Institute concluded: “Although controversial, the new hybrid plan will boost retirement incomes for most of the state’s public school teachers. Our simulations show that two-thirds of newly hired teachers will earn more retirement benefits under the hybrid plan than they would have earned under the old plan.”

(The Urban Institute study was partly paid for by the Laura and John Arnold Foundation, which has become controversial in Rhode Island because of Arnold’s financial support for Raimondo and her allies. “Funders do not determine research findings or influence scholars’ conclusions,” the institute said in a disclaimer.)

In June 2012, a group of 205 union and retiree plaintiffs sued to overturn the pension law, charging that it made unconstitutional changes to what they alleged is a contract between them and the state for retirement benefits. The unions were not granted an injunction to halt implementation of the law, however, so all the changes still went into effect on July 1, 2012.

Union leader wants settlement talks

Analysts at Moody’s Investors Service have repeatedly raised concerns over the uncertainty about the legal status of the pension changes. The possibility of an adverse ruling is often described in terms that make it sound like a fiscal Sword of Damocles hanging over Smith Hill.

Lawmakers have already relied on savings from the pension overhaul to balance the budget in the past few years. That’s unlikely to change, considering annual deficits are already projected to rise to more than $400 million by 2018-19 even if the pension law is left entirely in tact.

Robert Walsh, a member of Magaziner’s Treasury transition team who is also executive director of the National Education Association Rhode Island teacher’s union, a plaintiff in the pension suit, on Monday reiterated that he thinks Raimondo and Magaziner should resume settlement talks, perhaps even before Chafee leaves office.

“I think that everybody seems willing,” Walsh told WPRI.com. He added: “You really can’t do a lot until you get a settlement. You can’t do a lot of anything in the state because it’s hanging over everybody’s head as a big question mark as to what it will mean financially.”

Walsh suggested a new round of settlement talks should include legislative leaders from the start, unlike the previous round, which excluded them because they aren’t named as defendants in the suit and the mediation was court-ordered. He also said the proposal to exempt retirement income from taxation, if done on a parallel track with settlement talks, could speed the process.

Walsh acknowledged some of his union’s members remain staunchly opposed to settling the suit, preferring to take their chances in court, but he argued that’s too risky. “Anybody who believes that we’re going to get back absolutely everything as it was is probably going to be significantly disappointed by a court settlement in five or six years after all the appeals are done,” he said.

Walsh previously suggested in 2011 the state could reasonably boost its forecast for the pension fund’s investment returns from 7.5% to 7.75%, which would reduce the shortfall on paper, but on Monday he said he no longer thinks that makes sense considering the current state of the equity markets.

J. Michael Downey, president of AFSCME Council 94, the state’s largest public-employees union, did not respond to a request for comment Monday.

One group that has serious reservations about a settlement are leaders of Rhode Island’s 39 cities and towns, all of which pay into it for schoolteachers’ retirement benefits and some of which also use it to handle their municipal workers. Many of them complained vociferously about the previous settlement because it called for them to pay more into the pension fund even though they hadn’t been involved in the closed-door negotiations.

Dan Beardsley, the longtime executive director of the Rhode Island League of Cities and Towns, which lobbies on behalf of municipalities, was the only member of the State Retirement Board who voted against the settlement when Raimondo put it forward in February. “I would love for a mediated settlement to be acceptable to cities and towns,” Beardsley told WPRI.com on Monday, but “the devil’s in the details.”

Tim Duffy, executive director of the Rhode Island Association of School Committees, expressed similar concerns about the financial impact of a settlement on cities and towns, a number of which are financially strapped, and said they should be included in the discussions. He warned the impact would be severe if the law got thrown out, as well.

“The budget commissions will be in virtually every city or town at that stage,” Duffy told WPRI.com. “I mean, if the law is repealed then it’s going to be chaos in the state. I don’t know how some municipalities are going to survive.”

Legal battle could last past 2016

Meanwhile, with no settlement on the table, the lawsuit continues to wind its way through the courts.

R.I. Superior Court Judge Sarah Taft-Carter is overseeing union-backed legal challenges to three separate rounds of state pension changes: two against smaller benefit reductions in 2009 and 2010, and then the major one against Raimondo’s high-profile 2011 overhaul. Taft-Carter, 57, is the daughter of the late Cranston Mayor James Taft, and was appointed in 2010 by former Gov. Don Carcieri.

Back in September 2011, Taft-Carter issued an initial ruling that there is an “implied contract” between workers and the state when it comes to pensions, entitling retirees to their promised benefits. However, she has not ruled on the state’s other argument – that lawmakers had a legally valid reason to break those implied contracts because they pose an unmanageable financial burden.

The two sides in the pension litigation spent January 2013 to February 2014 engaged in closed-door mediation talks ordered by Taft-Carter, and eventually came up with last winter’s proposed settlement, which was rejected by the police officers in April. Taft-Carter initially set a Sept. 15 start date for the suit to go to trial, but she soon backtracked as the sides got bogged down by pretrial motions.

The sides are currently waiting for Taft-Carter to issue a decision on state lawyers’ request for a jury trial in the suit. The next time they’re scheduled to be in court is Dec. 2 if she issues a decision before then, officials said. Chafee’s and Raimondo’s offices are remaining mum.

“As we have stated in the past, the state’s legal positions in the litigation will be set forth fully in the documents filed with the court and the oral arguments made in court, all of which will be a matter of public record,” Raimondo spokeswoman Ashley Gingerella O’Shea said last month. “Otherwise, the state will not be commenting on this ongoing litigation.”

It’s unclear how long the legal process will drag on. Taft-Carter has yet to set a new trial date, and her eventual ruling will almost certainly be appealed to the R.I. Supreme Court no matter which side wins. Moody’s recently suggested a final decision might not be reached until “2016 if not later” – at least five years after Chafee signed the original law.

Other states are also grappling with how to fix underfunded pension systems. Last month, the Colorado Supreme Court ruled that lawmakers there had the right to reduce pension cost-of-living adjustments for that state’s retirees. A group representing the pensioners decried the decision as “a major departure from the rule of law.”

Regardless of the outcome, Beardsley said the pension battle has become the most compelling Rhode Island policy battle since he joined the League of Cities and Towns in 1974.

“It’s absolutely fascinating – the most fascinating issue I’ve dealt with in four decades,” he said. “No question. The consequences are financially astronomical. If the decision goes the wrong way – if the trial goes all the way through and if the Supreme Court upholds, say, an onerous decision on cities and towns – there’ll be half-a-dozen receiverships. Without question.”

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

An earlier version of this story said the plaintiffs did not seek an injunction to halt implementation of the pension law before July 1, 2012; they did ask for one shortly before it took effect, and were denied.

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