Cuts
for the Already Retired: Pension Deal in Rhode Island Could Set a Trend (Mary
Williams Walsh / New York Times)
December 19, 2011
Retired police and
firefighters from Central Falls,
R.I., have agreed to sharp
pension cuts, a step thought to be unprecedented in municipal bankruptcy and
one that could prompt similar attempts by other distressed governments.
Matthew J. McGowan, who
represents the retirees, said the agreement could be groundbreaking if the
courts approved it.
If approved by the
bankruptcy court, the agreement could be groundbreaking, said Matthew J.
McGowan, the lawyer representing the retirees.
“This is the first
time there’s been an agreement of the police and firefighters of any city or
town to take the cut,” he said, referring to those already retired, who are
typically spared when union contracts change. “I’ve told these guys they’re
like the canary in the coal
mine. I know that there are other places watching this.”
As cities, towns
and counties struggle with fiscal pain, there has been speculation that they
could shed their pension obligations in bankruptcy. Some have said it might, in
fact, be easier for local governments to drop those obligations than it is for
companies, which use a different chapter of the bankruptcy code. Large steel
companies, airlines and auto suppliers like Delphi
have terminated pension plans in bankruptcy.
“But it’s a fight
that municipalities haven’t been willing to fight,” said David Skeel, a law professor at the University of Pennsylvania
who writes frequently on bankruptcy.
Municipalities
have been reluctant because public pensions are protected by statutes and
constitutional provisions meant to make them nearly airtight. And even if the
rules could be broken in bankruptcy, that would
present a different problem. Local officials who want to cut pensions do not,
as a rule, want to shortchange their bondholders for fear of not being able to
borrow in the future — yet bankruptcy law requires that both types of creditors
be treated equitably.
Rhode Island sought to
sidestep the issue with a law that gave bondholders more protections than
retirees. Central Falls’s retirees used that issue to gain some bargaining
power, extracting a commitment from the state to seek extra money for the next
five years. The extra money is not a sure thing, though, and would not cover all
the cuts to the retirees over those years.
The last American
city to work its way through Chapter 9 bankruptcy was Vallejo, Calif.,
which finished the process this year. It had to navigate similar stumbling
blocks. Initially, it planned to cut its workers’ and retirees’ pensions, but
it changed course when California’s giant state pension system, which
administered Vallejo’s plan, threatened a costly and debilitating court battle.
Vallejo instead cut pay,
health care and other benefits, as well as city services and payments to its
bondholders, and left the pensions intact. Even though the bondholders faced a
loss, all parties eventually agreed they had been treated equitably, and the
state passed a law making it easier for Vallejo
to continue borrowing.
The episode
strengthened the perception that public retirement plans were unalterable, even
in bankruptcy.
“Central
Falls is undermining that,” said Mr. Skeel,
who wrote about Vallejo’s bankruptcy for a
coming issue of The University
of Chicago Law Review.
Central Falls had little
choice. For years, its government failed to contribute enough to its police and
firefighters’ pension fund, and the fund effectively ran out of money this
fall. The city, which had also promised the retirees comprehensive health benefits,
could not cover the pension and health payments out of its general revenue.
The police and
firefighters have known for months that drastic cuts were looming. Last month,
the unions representing active workers negotiated new contracts, which called
for workers to complete at least 25 years to receive pensions, instead of 20.
Workers will also have to meet much more rigorous standards to qualify for
disability pensions.
Until now, 60
percent of Central Falls
police officers and firefighters have retired on full disability pensions,
drawing the inflation-protected and tax-free payments even when they embarked
on new careers. One of them, at 43, has become a prominent personal-injury
lawyer and can be seen in television ads shooting baskets and pretending to
fall down a manhole. That retiree, Robert Levine, a former police officer, said
his disability was the result of an on-duty car crash where he was not at
fault, and that his pension had been granted lawfully after his condition was
certified by three different doctors.
The retirees, who
are not represented by the unions, voted in favor of their pension reductions
last week. The cuts would be up to 55 percent of each retiree’s benefits, which
now vary widely, from about $4,000 to $46,000 a year, depending on final
salary, years of service and other factors. A few retirees would give up more
than $25,000 a year. Central Falls’s
police and firefighters do not participate in Social
Security.
The new agreement
also reduces the annual cost-of-living adjustments and requires retirees to
start contributing toward the cost of their health benefits. But it does not
take disability pensions away from retirees — something that could become a
sticking point.
They have extracted a
commitment from the state to seek extra money for the next five years.
In the
negotiations, the state’s revenue director promised to seek money from the
state — enough to pay most retirees a supplement of several thousand dollars a
year for five years.
Having recently
enacted a big and painful package of pension cuts for state workers and
teachers, Rhode Island legislators say they are in no mood to help a city’s
retirees who stripped their own pension fund, often collecting disability
pensions when they were well enough to work.
The retirees’
lawyer, Mr. McGowan, won support for the state money by threatening to challenge
a state law enacted just before Central
Falls declared bankruptcy last summer. The law
protects holders of general-obligation bonds issued by Rhode Island and its municipalities by
giving them priority in bankruptcy. Without the law, investors could find
themselves subject to the same losses as the retirees.
The state law was
intended to prevent a contagion effect, in which Central Falls’s bankruptcy would frighten
investors away from other cities’ bonds, driving up borrowing costs across the
state.
The idea of
shielding municipal bondholders during bankruptcy is controversial, however.
“It’s not clear to
me that you ought to be protecting bondholders,” said Mr. Skeel.
“It seems unfair to me that you’re singling out one type of creditor to bear the
burden, and another type not to.”
Mr. McGowan, the
retirees’ lawyer, said he had threatened to sue Central Falls’s bondholders on
the argument that the state law had given them a “voidable
fraudulent transfer”— an abusive deal that could be undone by a bankruptcy
court. He said the state did not want such a challenge, so it agreed to push
for pension supplements.
Theodore Orson,
who represents Central Falls’s
state-appointed receiver in the bankruptcy, said negotiations would have been
impossible without the law. He said he thought Chapter 9 should be amended to
give cities the ability to shield their bondholders if they could show a
compelling need to do so. But that would take an act of Congress, and federal
lawmakers, at odds over their own debt and deficit, show no interest in taking
on the cities’ fiscal woes.
“One thing I think
we’ve demonstrated in Rhode Island
is, we really have a functional state government,” Mr. Orson said. “We are
pulling together and making what we believe to be difficult decisions that you
don’t see Congress making right now.”
http://www.nytimes.com/2011/12/20/business/pension-deal-in-rhode-island-could-set-a-trend.html?pagewanted=1&_r=1