PROVIDENCE – In a decision that could have a severe impact on Providence’s finances, the Rhode Island Supreme Court ruled Tuesday that if the pension plan for city employees and retirees is changed by the courts, it can’t be changed again by the City Council -- unless the workers agree to the changes.
That means that the city’s 2012 pension reform ordinance does not apply to several dozen retired firefighters and police officers because they were already part of previous pension changes enacted years earlier.
The ruling is expected to immediately cost the city several million dollars, but the long-term impact may be more dire because it effectively blocks municipal leaders from unilaterally making more changes to the pensions of thousands of current and former town and city workers.
Writing for the majority, Chief Justice Paul Suttell wrote that the City Council in 2012 did not have the legislative authority to freeze the plaintiffs’ cost-of-living adjustments (COLAs) until the city’s pension system was 70 percent funded because those retirees had already entered into previous agreements that reduced their pensions -- some in 1991, some in 2004.
“The 2012 Pension Ordinance purports to legislate over and around these final judgments, which is an undeniable violation of the doctrine of separation of powers,” Suttell wrote.
The decision does not affect the thousands of city employees and retirees who agreed to a class-action settlement in 2013 that froze 3 percent COLAs for 10 years, eliminated 5 percent and 6 percent COLAs forever, and shifted how pensions are calculated. That deal also moved retirees over the age of 65 to Medicare.
That agreement came after then-mayor Angel Taveras warned that the city was facing a $110 million structural deficit and was at risk of running out of money. All of the city’s public employee unions and most of its retirees agreed to the changes.
Superior Court Justice Sarah Taft-Carter approved the 2013 settlement, but a years-long legal battle ensued with dozens of retirees who sought to opt-out of the deal. Taft-Carter dismissed their lawsuit in 2017, but the Supreme Court’s ruling today largely overturns her decision.
The decision will likely result in a cash windfall for a subset of plaintiffs who were part of previous agreements with the city because they are now entitled to their annual COLA payments – some of which increased by 5 percent and 6 percent a year – dating back to 2013.
It’s not immediately clear how much they’ll receive, but attorneys have estimated it could be several million dollars.
The precedent set by the decision is of greater concern for future city leaders.
The ruling means that the city’s public employee unions and retirees who were part of the 2013 settlement now have a Supreme Court decision that they can point to if the city tries to make more changes to their pensions, such as extending the suspension of COLAs beyond 2022 -- something that Mayor Jorge Elorza has warned that he may need to consider.
The 2013 settlement also requires that the city continue to make at least 95 percent of its actuarially required contribution to the pension system each year, a figure that is expected to grow by 3.5 percent a year, from $90 million in 2021 to $173 million in 2040. Elorza has called those payments “unsustainable.”
Elorza, a Democrat who is eyeing a run for governor in 2022, has said that he fears the city may need to file for bankruptcy in the future if it doesn’t alter pensions or receive an infusion of cash to stabilize its pension system.
“Today’s Supreme Court decision will ensure that the unsustainably generous pensions that were doled out in the past will continue to be an albatross over our city for decades to come,” Elorza said in a prepared statement. “This decision will force the city to make very difficult decisions about how to pay for ballooning pension payments at the risk of short-changing critical needs like public education, social services and infrastructure investments.”
Providence’s pension system is just 26 percent funded with unfunded obligations topping $1 billion. Elorza spent years advocating for state lawmakers to allow him to sell or lease Providence’s water supply to a quasi-public agency and deposit the proceeds into the pension system, but he pulled the plug on that plan last year after receiving little support for the idea.
Robert Flanders, a former state Supreme Court justice who was the receiver of Central Falls when the tiny city filed for bankruptcy in 2011, said the decision means a legislative body “cannot alter or vacate” a court judgment.
He said Providence may have to consider bankruptcy in the future, although he acknowledged that Rhode Island law requires the state to sign off on a municipal bankruptcy, and Governor Gina Raimondo has shown no appetite for supporting that action.
Flanders said too many city leaders – including Elorza – have brushed off bankruptcy as an option because the city has run a surplus for five consecutive years, and property taxes have remained stable during Elorza’s tenure in office.
“Bankruptcy should be a last resort, but it should never be taken off the table,” Flanders said.
Aside from ruling that previous pension agreements can’t be overturned without the consent of the unions and the retirees, the Supreme Court also ruled that 67 plaintiffs who were not part of a previous pension reform agreement with the city cannot have their COLAs frozen until the system is 70 percent funded because more than half of them will likely die before that happens.
“The suspension of COLAs can hardly be called temporary for those pensioners,” Suttell wrote.
The Supreme Court sent the case back to Superior Court to determine a finite time for their COLAs to remain frozen. It’s likely that the city will argue that those retirees’ COLAs should be frozen for at least as long as those of the members of the 2013 settlement, who are expected to begin receiving their COLAs in 2023.
The Supreme Court ruled that the group of retirees who opted out of the agreement that allows the city to move retirees to Medicare when they turn 65 must receive the same health benefits that the people who opted into the agreement receive. The city covers certain costs associated with Medicare, including penalties incurred from late enrollment in supplemental programs like Parts B and D.