12/20/12

Courts Will Settle RI Pension Law Challenge



Superior Court Judge Sarah Taft-Carter has forced the state to go into federal mediation with the public employee unions over the terms of the landmark pension reform law. Both sides will now meet and the unions will be pressing to claw back some of the changes that the General Assembly approved last fall. Don’t expect much to come of the mediation attempt, however. The state and the unions will probably still be going to trial come February.

Why? Because any concession the state might consider will upset the financial structure of the reforms in place and cost millions. So the state will balk on conceding much of anything to the unions, which will mean the mediation effort will fail and the two sides will have no choice but to head into court, which is precisely where this case should be settled.  In court the state has a strong case to make.

To bring us up to date on the Judge’s decision, a bit of background is in order. The public sector unions have taken the state to court over the landmark pension reform legislation, which was entirely expected. The pension law altered some of the pay and retirement benefits stipulations contained within existing contracts between the unions and the state; retirement eligibility ages were raised, younger workers saw the introduction of 401k plans for part of their retirement savings, and COLAs were eliminated for a period of ten years. These sweeping actions were taken because the state faced an unsustainable pension nightmare, with more and more tax dollars every year feeding exponentially rising pension demands. If nothing was done, the state would go bankrupt.

To its credit, the Democratic controlled General Assembly responded to the mountain of data and analysis presented by General Treasurer Gina Raimondo and voted overwhelmingly in favor of the reform plan that she presented, and Governor Chafee, who had courted and received critical union support in winning a three way gubernatorial race, backed her. The reform law is saving Rhode Island millions of dollars each year while strengthening the pension system for the long haul.   

While politicians voted for the plan, the unions did not. Their offered solutions to fix the pension problem was to raise taxes and refinance the pension system over the next twenty years, a move that was estimated to cost the state a billion dollars. As soon as the pension reform law passed, their leaders vowed to meet the state in court, which brings us to the present. They are arguing that promises made in collective bargaining agreements made with the state over the years contain an implied contract, and breaching that contract over the objections of the unions is illegal.

Governor Chafee has not been helpful to the state’s case. Having backed the Raimondo pension reform plan and signed the legislation into law, the Governor surprised everyone when he said that the state would be better served by sitting down and negotiating a settlement with the unions, in the manner of most civil law cases that get settled before they ever go to court.  But this is hardly a typical civil law case. Like a nervous Nellie, the Governor is afraid of the state losing the case. Or is he more concerned at this point with currying union favor for the next election?

The fact is, the state can’t afford to give anything back right now or for some years to come. As Gina Raimondo understands better than anyone, altering the terms set into the law would be a calamity, potentially bankrupting the state. Thankfully, legislative leaders understand this too, despite the pressure this puts upon them.

Let the case proceed in Superior Court. It will go up to the Supreme Court next, regardless of which side wins in the first round.  Now is not the time to panic. Let’s keep calm and carry on, fortified by a legally sound case that will prevail in the end. 

    

38 Studios Fallout Will Dog RI for Years




Like the first traces of snow on the ground to signal winter’s arrival, the fallout from the 38 Studios disaster is beginning to be felt in the Ocean State. Yet another state-by-state ranking – this one by the 24/7 Wall Street blog, has listed Rhode Island as the second worst run state in the country right now (after California, which has been publicly compared to Greece, because of its debt burden).

The 24/7 Wall Street blog, which provides “analysis and commentary for U.S. and global equity investors,“ summarized the state’s negatives in arriving at the dismal 49th ranking: $9.5 billion in public debt, one of the worst debt burdens in the country, amounting to $9,000 per person, and a failed loan guarantee for 38 Studios that represents “ a spectacular example of fiscal mismanagement.”  

The 38 Studios debacle is going to dog Rhode Island for years to come. First, there’s the $110 million we owe to the holders of the bonds the EDC floated. Payments on those bonds will soon start to come due, and will weigh on the annual deficits the state faces ($130 million next year and bigger annual debts to follow). Then there’s the legal storm that is forming. The state is taking legal action in the form of indictments against those within 38 Studios and the EDC that it is holding responsible for the gaming company’s collapse. Those lawsuits allege fraud, negligence and legal malpractice against 14 individuals, including Curt Schilling and the EDC’s former director, Keith Stokes. A first hearing on the state’s allegations will occur in January.

House Speaker Gordon Fox, who survived a tough reelection challenge that focused on his role in the 38 Studios deal, has pledged to open oversight hearings to focus on what happened within the EDC in vetting and approving the deal. He has promised “substantive and thorough” hearings, but he will want to steer the inquiry away from the actions of the General Assembly leadership, if he can, in shepherding the final $125 million loan legislation, of which 38 Studios was quietly designated to receive the lion’s share. Assembly members, to include Democrats, are on record as saying they had no idea that they were voting for a secret deal for 38 Studios inside the legislation. 

In the meantime, auctions of 38 Studios’ physical assets have netted a pittance – less than a million dollars - and while the company’s intellectual properties may be worth additional monies, the total amount clawed back will be negligible overall.  The state’s lawsuit won’t bring back much either: even if the state can convince a jury to convict, which is debatable, Schilling will probably have filed for bankruptcy already and the other defendants may well be acquitted.

The fact that Governor Chafee, who brought the lawsuit, declared a desire to sue members of the EDC board when he was a candidate for governor, even before 38 Studios ran into trouble, may be construed as prejudicial before a jury.  Remember, even though he opposed the deal in the first place, Chafee, as Rhode Island’s elected chief executive, had a duty to husband the enterprise along and watch out for taxpayers’ risk.  He appears to have learned of the company’s troubles when it was too late to save it, and he refused to bail it out when it was short on its first repayment, forcing it to default.

Taking legal action against Schilling, Stokes and the others is shortsighted and, as has been suggested, may do more harm than good.  First, it’s not going to recoup any significant money to help pay off the bond obligation; the lawsuit may collapse under its own weight (there has been no evidence of financial chicanery within 38 Studios that’s come to light thus far, and the state appears to have forced the company to ramp up its employment too fast). And it will surely send a cold, cautionary message to entrepreneurs and other businesses considering setting up shop here, that doing business in Rhode Island - and doing business with the state of Rhode Island – could be a dicey proposition.

One thing the Governor is right about: we cannot default on the bonds. It’s not helpful that former Governor Don Carcieri, who had a huge, largely unexamined (to date) role in the 38 Studios affair, has suggested otherwise. As a former banker he should be the first to understand the consequences that would accrue to a state that defaults on bonds it legally assumed.  But then again, as a former chief executive of Cookson America, one would have thought that he would have been wary of throwing so much money at a fledging video game venture led by a retired baseball player with zero business experience beyond signing autographs and collecting WWII memorabilia and gold coins.

The sad fact that hangs all over the 38 Studios deal is the heavy-handed, backroom deal-making among insider politicians who first pressured the EDC to approve the deal, and then masterminded a legislative sneak attack that pushed through an opaque small business funding program in which most of the money was assigned to one company, which just happened to be owned by a Red Sox hero.  Notoriety and star-power easily opens doors, and makes otherwise sane, prudent men do things that result in “spectacular mismanagement” of taxpayer money.