With one community in receivership already and several other Rhode Island municipalities struggling to avert near-term bankruptcy, pension obligations at the municipal level represent the next crisis facing our state. Many of our 39 cities and towns face massive pension obligations in the years ahead, obligations that will drain treasuries and are simply not sustainable. How best to tackle this crisis is the big question right now, as two plans have emerged which make for different approaches, much like those taken by the tortoise and the hare in the Aesop fable.
Governor Chafee and General Treasurer Raimondo have set forth quite different pathways for struggling cities and towns to use to get their financial houses in order. Raimondo’s plan, a direct result of last fall’s special session pension legislation, is the slow and steady approach, best suited for those municipalities that are in better financial shape and can proceed through the due diligence mandated under the law. The Governor’s plan, on the other hand, is a fast-action rescue package.
The pension overhaul legislation sets out an ordered process for cities and towns to go through in evaluating their shortfalls and to plan a recovery strategy. This part of the legislation was not the main event, as the Raimondo task force focused primarily on mechanisms for state relief from pension obligations – COLA elimination, retirement age increases, and switching current state employees and teachers into a hybrid pension-401k model. The General Assembly, at Raimondo’s urging, did not include immediate remedies for cities and towns, as both the Governor and a number of mayors wanted, but rather a directed pathway for eventually getting aboveboard on pension obligations. Cities and towns were required to study and project long-term pension costs, and to submit a current report on the relative health of their individual plans. Those studies are still in process, with some municipalities already reporting and others still working the numbers.
The Governor, calling 2012 his “Year of Cities and Towns,” has pledged a more aggressive approach, one designed to allow sinking municipalities to pull the plug on their obligations in real time. This approach, which requires General Assembly action, is a welcome life preserver for places like Providence and Woonsocket which are up against real deadlines. Chafee is asking the legislature to approve his relief package allowing immediate COLA suspensions, lifting of certain state mandates, reducing disability pensions for police and firefighters, and suspending teacher step increases, if they are classified as “distressed communities.” He’s been meeting with local officials of late talking up his plan and touting it as the best way to avert bankruptcy and avoid ruinous property tax increases.
But local officials have also been hearing from Gina Raimondo, who has been holding pension workshops, as she said she would, outlining her slower and safer approach. She is urging local officials not to seek a quick legislative solution, as the Governor is, except as an absolute last resort, because it carries the real risk of a court-ordered reversal. That’s due to the different situations that the state faced and the ones that municipalities face, and the sticking point comes down to the difference between statute and collective bargaining.
At the state employee level, pension benefits are a matter of law set forth by the legislature, but at the local level these benefits were negotiated between municipal leaders and unions. Everyone seems to agree, and legal rulings across the country to date support the same, that it is much more difficult to break a contract. In a court of law, the bar is set higher in justifying abrogating a settled contractual matter in place over a period of time – a “compelling public purpose” must be argued successfully. Some judicial decisions have recognized that purpose (as was the case concerning East Providence versus its teachers union a few years ago, although the issue of a lapsed contract was also involved there). Other judges have upheld labor’s arguments and faulted municipalities for not trying to find another solution before they cancelled a contractual obligation.
Even the state pension overhaul is being legally challenged and it is possible that Rhode Island officials one day might receive a rude awakening for overhauling the state pension system in the manner that they did. At this point they remain confident that their case will prevail. Any city and town that cancels contracts with its unionized employees is sure to end up in court, with the state alongside if the Governor and the General Assembly provide them the means to do so.
The clock is ticking, however, and the money needed to make local pension plans whole again is not going to materialize from anywhere, so the question remains: what is the best approach in the end, that of the trudging tortoise or the hasty hare? The fable, for its part, provides an answer.