In a research note, Moody’s analyst Tom Compton praised the tentative settlement on pensions and retiree health benefits that Taveras has negotiated with the city’s unions and retired workers. The police and fire unions, as well as the two department’s retirees, have all voted to approve the deal.
“The changes offer significant relief to the highly leveraged and fiscally stressed city,” Compton wrote. It will reduce the fixed costs – pensions, retiree health benefits and debt service – that made up about 22% of Providence’s operating-fund spending in 2011-12.
“Approval of this settlement marks another achievement by Providence in altering existing contractual agreements with active employees and retirees,” he wrote. “We expect it to set a precedent that other struggling Rhode Island cities and towns can follow.” He called the Taveras administration’s process of negotiating under court oversight “an effective tool to manage the rapidly growing expenditures.”
“The ability to reduce the [pension] liability will be critical to the city’s long-term credit strength,” he said.
The deal “will provide immediate and long-term budgetary relief” to Providence even though the reductions “are significantly less severe” than those ordered in Central Falls, according to Compton. It will reduce annual pension costs by 25% and annual medical benefit costs by 13% from the previous year’s level.
Moody’s pegged the 2012-13 savings from settlement at $22.5 million: $18.5 million from the pension changes and $4 million from the retiree health changes. The deal will reduce the city’s unfunded pension liability by $170 million, or 19%, and cut medical costs by $40 million over the next decade. Moody’s did not estimate the reduction in Providence’s unfunded liability for retiree health care.
(chart: Moody’s Investors Service)