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Pension Reform in Providence: Part Three, The State of Rhode Island

Like many other pensions across Rhode Island, the state capital’s plan is underfunded. But do the municipalities have the will to fix them?

Pensions almost cost Providence Councilman John Igliozzi his job as chairman of the city council’s finance committee. In April 2012 the city council passed a crucial vote on a bill designed to curtail escalating pension costs in an effort to stave off insolvency bought on by pension obligations and massive underfunding. After objections from union beneficiaries, who filed suit against the Rhode Island capital, Igliozzi moved to block the reform effort.

Igliozzi, who hails from a family that’s long been active in Providence affairs, initially supported the bill; in fact, he voted for it. But on May 3, he and fellow Councilman Terrence Hassett, also a member of the finance committee, announced that they regretted their vote and were seeking ways to change the agreed-upon reform legislation. That announcement led to a crisis on the finance committee as three other members sought to remove Igliozzi as chairman. After a tense weekend of negotiations, Igliozzi was able to keep his chairmanship only by agreeing to go along with the reforms — measures that almost everyone agrees were desperately needed.

As of May 2012, Providence’s pension fund had $250 million in assets and a funding ratio of roughly 34 percent. The city was required to pay $55.8 million into the fund for fiscal year 2012; by fiscal 2039, that number would rise to $207.4 million. The city was also paying out more than $7 million a month in benefits. A report put out by the city council subcommittee on pension sustainability on April 19 had warned that “without decisive and quick action, the city will soon run out of funds and will be forced to shut down normal operations and, ultimately, enter bankruptcy.”

The subcommittee had identified the cost-of-living adjustment (COLA) as a key contributor to escalating pension costs. Pension payouts were rising by 5 to 6 percent a year. By suspending these escalations until the funding status of the plan reached or exceeded 70 percent, the city hoped to get pension costs under control and avoid Armageddon. The problem: Both the fire and police unions strongly objected to this suspension, which in turn led to Igliozzi’s flip-flop.

Such are the difficulties of pension reform. The problem exists not just in Providence but across Rhode Island, as well as in many other states. The math is obvious: There are not enough assets to cover liabilities. Yet amassing and maintaining the political will to achieve fundamental change are difficult and often impossible. Union critics and their allies argue that the fault is with politicians for not fully paying pension obligations during the good times. The burden should not, they say, be placed upon beneficiaries, who have been promised their pensions.

With unions prepared to fight, pension reform could very well go all the way to the U.S. Supreme Court. Whereas the pension problem could leave a city like Providence bankrupt, few politicians, particularly on the left, have the will to tackle the problem and the tangle of political issues and constituencies attached to it. Those who do often find themselves, like Igliozzi, vulnerable.

In this article, the third in a three-part series examining the Providence pension plan, Institutional Investor explores the politics and consequences of pension reform in Providence and across the state. What this reveals is the similarity of the pension problems and reform politics of both Providence and municipalities statewide.

The pension question has taken on particular urgency in Rhode Island. Two of the front-runners in the Democratic September 9 gubernatorial primary, Rhode Island general treasurer Gina Raimondo and Providence Mayor Angel Taveras, have both claimed pension reform as among their achievements. Yet whereas Raimondo was willing to take drastic steps to fix an underfunded pension system statewide, the Providence reforms were much more modest. As a result, Providence, like many other municipal pension plans in Rhode Island, remains dangerously underfunded. Meanwhile, more severe state reforms are being challenged in court. Rhode Island’s next crop of leaders, whoever they might be, will likely have to take on the pension issue again if they want to put their state on the path to fiscal health.

At a Rhode Island Democratic gubernatorial debate in August featuring Raimondo, Taveras and a third candidate, Clay Pell, the grandson of former U.S. senator from Rhode Island Claiborne Pell, pensions continued to be a key point of contention between the mayor and the treasurer. “We made changes to our pension fund that were very difficult,” Taveras said. “We did it because we wanted to avoid bankruptcy.” The Providence fund, countered Raimondo, “is only 30 percent funded, the same level as when he [Taveras] took office.”

Characterizing himself as the progressive candidate, Taveras has attacked Raimondo for giving money to Wall Street by investing pension assets in hedge funds. The city plan actually invests more of its assets in hedge funds. The mayor is a fiduciary of the city plan (see “Pension Reform in Providence: Part Two, The Hedge Funds”).

On June 26, Rhode Island Council 94 of the American Federation of State, County, and Municipal Employees (AFSCME), AFL-CIO, announced it was endorsing Taveras for governor. The union, which represents 10,000 retirees and workers in the state, has been among the most vocal opponents of Raimondo and her pension reforms. In its statement announcing the endorsement, Council 94 said it made its decision based on his “humble beginnings and past union membership; strong track record as the chief executive for the city of Providence; ability to successfully negotiate solutions to complex problems while Providence was under financial duress; and vision to get Rhode Islanders working again.”

Yet there remains ample evidence that Providence’s pension fund is not yet fixed. More than most other members of the city council, Igliozzi should know that. Both Igliozzi and Taveras sit on the Board of Investment Commissioners (the mayor is the chair), which has oversight for management of the city’s pension assets. At a May 3, 2012, meeting of the board — a meeting Taveras did not attend — the state’s longtime investment consultant made clear that even with proposed reforms, the pension plan was still unsustainable. It was giving out more in benefits than it was taking in, and that gap was expected to grow over time. In other words, on the same day Igliozzi tried to overturn the COLA freeze, he was explicitly told that the plan was still in dire shape. At the meeting, Igliozzi, a lawyer, further suggested that to help manage the problem, the investment consultant might want to consider taking more market risk with the pension portfolio.

Taveras and the city council were able to strike an agreement with the union over the pension plan by suspending the COLA, though for only ten years. In announcing the deal, Taveras said, “I hope that history will show this to be one of Providence’s finest hours: the moment when those with the greatest stake in Providence’s future came together to accomplish the painful and difficult work needed to pull Providence back from the brink.” Limiting the COLA suspension to ten years further reduced the effectiveness of the changes (see “Pension Reform in Providence: Part One, The Reform Process”).

When the mayor announced he was running for governor in October 2013, his campaign cited his role in negotiating Providence’s pension reform, calling it a model that others have followed. It is true that other Rhode Island municipalities have sought to implement similar reforms. In January, Rhode Island’s Superior Court approved an agreement that Allan Fung, the mayor of Cranston, negotiated with his city’s fire and police unions.

Like Taveras, Fung, who is running for governor as a Republican, had tried to freeze the COLA indefinitely. The unions then sued and agreed to a ten-year suspension. Like Providence, Cranston has a badly underfunded pension plan. In December 2011, the city with a 2010 population of 80,529 had a fire and police pension fund with $55.3 million in assets and accrued liabilities of $311.4 million, only 17.8 percent funded. By July 30, 2012, Cranston’s funded liability had fallen to 15.5 percent. Even with the frozen COLA, the situation is not improving. From June 2010 to June 2014, Providence’s funding ratio also dropped, from 34.06 to 31.39 percent.

Taveras and Fung both sit on the board of the Study Commission for Locally-Administered Pension Plans. The commission came about as a result of Rhode Island’s 2011 Retirement Security Act. This was the legislation the state’s treasury department championed to tackle the funding problem of the $8 billion state pension system. An aspect of the Retirement Security Act, which has received little public attention, is what it says about municipal retirement plans, like those in Providence and Cranston.

The Retirement Security Act recognized that in addition to the state retirement fund, Rhode Island had a problem at the municipal level, and set up the commission to do something about it. Rhode Island had 36 locally administered municipal plans. Collectively, as of September 2011, they had a funding ratio of 40.3 percent, but of those plans, 24 were deemed “at risk,” with funding ratios below 60 percent. The state legislature has no direct authority over these municipal funds, so the goal of the commission was to review the plans and provide guidance.

The commission is now winding down. Of the 24 plans that were in critical condition in 2011, all remain so today. The commission is scheduled to present recommendations to Rhode Island’s General Assembly this fall. It plans to recommend the establishment of a permanent local pension plan oversight board. At issue is how much authority such a board would have over local funds and what, if any, means it would have to ensure that local municipalities meet their obligations.

Failure to address the pension burden has real consequences. Unlike the state, a municipality can go bankrupt. In 2011 the Rhode Island town of Central Falls went bust because it could not cover pension and other retirement obligations. As a result, many of Central Falls’s 141 police and fire beneficiaries saw their pensions cut by 50 to 55 percent. For example, former acting fire chief Gerard Dion had his pension slashed from $75,789 a year to $34,628 a year, and former firefighter Robert Noury’s pension fell from $68,351 a year to $30,786.

Since announcing his run for governor, Taveras has not attended a single Study Commission for Locally-Administered Pension Plans meeting. Yet given the funding problems in Providence and at other state municipalities, it seems inevitable that in the next four to eight years, the question of what to do about these systems is going to be a problem for Rhode Island’s leaders. Moreover, if the courts decide to overturn the 2011 Retirement Security Act — and a settlement cannot be reached with the union holdouts — the question of defined benefit funds in Rhode Island will be back on the table. Ironically, one of the factors providing financial relief to municipalities such as Providence and Cranston is that, as a result of the 2011 act, they have had to pay less into the state’s pension coffers.

As for Councilman Igliozzi, he is running for, and is expected to win, a new term on the city council.

Follow Imogen Rose-Smith on Twitter at @imogennyc.

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