Analysis: Taveras cut pension deal in a bid to avoid bankruptcy

taveras_NM_5-11-2012_smallProvidence Mayor Angel Taveras won a historic court victory on Friday, as a Superior Court judge approved the first-term Democrat’s landmark settlement with retirees, immediately reducing the city’s long-term liabilities for pension and health benefits. Bloomberg News has described the outcome as “practically unheard of.”

But for a city that was openly considering bankruptcy just 14 months ago, does the deal save enough money?

Privately, Taveras aides don’t dispute that Providence will still be spending a lot of money on retirement benefits after the settlement. What they argue, however, is that they got just about everything they could outside Chapter 9 – and the long-term economic consequences of having Rhode Island’s capital city file for bankruptcy might have dwarfed any additional savings on retirement costs allowed by a judge.

There’s no doubt the settlement already saves quite a bit of money. According to the Taveras administration, the deal shaves Providence’s unfunded pension liability by $170 million, a roughly 20% decrease, and cuts its retiree health costs by $40 million over the next 10 years.

The changes mean Providence taxpayers’ annual contribution to the pension fund will be $58 million instead of $73 million this fiscal year, and $67 million instead of $84 million four years from now (2016-17). But even the reduced pension contribution will still eat up an ever-rising share of city resources, consuming 13% of revenue this year and 15% in 2016-17, the final year for which an estimate is available.

If Angel Taveras were designing Providence from scratch, it’s unlikely he’d devote 15% of the city budget to pension-fund deposits. But in practice the mayor had to deal with the enormous shortfall he inherited – mainly because of one disastrous vote by a union-controlled pension board in 1989 – and the highly uncertain legality of last year’s city ordinance to unilaterally cut benefits without negotiations.

While much attention has been paid to the settlement’s 10-year suspension of all cost-of-living adjustments (COLAs), that’s far from the only change it makes. For one thing, the city’s notorious 5% and 6% compounded COLAs have been eliminated permanently. And crucially, while retirees who used to receive those 5% and 6% COLAs are technically eligible for smaller COLAs in the future, in reality it’s unlikely they’ll qualify – because of the new caps on total pension payouts.

Those caps may be the most clever policy innovation Taveras chief of staff Mike D’Amico came up with to make the deal work. Going forward the total value of any pension in Providence – including COLAs – is capped at either 150% of the state’s median income or, in some cases, the base compensation of an active worker holding the retiree’s old job.

The bottom line is, many current retirees will never see a pension increase again thanks to this settlement.

But if that’s the case, why is Providence’s pension tab staying so high? The short answer: Gil McLaughlin.

Municipal workers in Providence aren’t being promised extremely generous pensions these days: the city’s pension-fund deposit for active workers will be a relatively modest $8.4 million this year and $9.9 million in four years, or 2.3% of revenue. Those amounts were also reduced by the settlement – down from $10.6 million and $12.4 million, respectively – thanks to the deal’s lower compensation calculations and larger employee contributions. (City officials argue that switching the active workers to a hybrid plan, as the state did, wouldn’t have saved much more money – although it would have reduced the risk to taxpayers.)

On the other hand, some retirees in Providence are collecting extremely generous pensions, starting with McLaughlin, who’s pulling down $196,800 tax-free this year after more than a decade of 6% compounded annual increases. While the settlement will prevent McLaughlin’s pension from reaching $800,000 if he lives to be 100, he’ll never get less than $196,800, either – and that’s still a very expensive payout, which illustrates why 85% of this year’s pension contribution – $49 million – is paying for pensions earned long ago, not this year.

Those costs, Taveras critics will likely argue, demonstrate that the mayor should have found a way to lower the size of McLaughlin’s pension instead of just keeping it from rising. The question is, how? There’s never been any indication that Providence’s higher-earning retirees would accept reductions in the dollar amounts of their pensions, whether voluntarily or as part of a settlement, and the General Assembly doesn’t want to touch the issue. That only left one option: Chapter 9 bankruptcy.

In the end Taveras made a judgment call: it’s better for Providence to bank the settlement’s savings and devote a big chunk of city revenue to pensions than to follow Central Falls into bankruptcy, allowing the city to shrink the six-figure payouts to McLaughlin and others but risking the unknown consequences of Chapter 9.

“Today is a historic day for the City of Providence,” the mayor told supporters in an email Friday. “The negotiated municipal pension settlement, which may be the first of its kind in the country, spares our city from a high-stakes legal challenge that could have resulted in bankruptcy.”

Did Taveras make the right decision? Only time will tell.

• Related: Moody’s: Providence retirement liabilities still huge after deal (March 19)

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