Joseph Krist

Municipal Credit Consultant

RHODE ISLAND PENSION SETTLEMENT PROPOSED

Rhode Island and most of its public employee unions reached a tentative settlement last week to the comprehensive challenge to the state’s 2011 overhaul of its beleaguered pension system. The settlement, which affects 59,000 current and past state employees, provides for adjustments to the minimum retirement age, the chance for more frequent cost-of-living increases and an increase in the defined-benefit pensions available to longtime public employees. If approved by the court and the General Assembly, the proposal would end litigation from six challenges arising from changes made to the pension system in 2009, 2010 and 2011. The court will set a schedule for the parties to implement the settlement, and the remaining three lawsuits will be addressed by the Court. The April trial date will be vacated for the purpose of implementing the settlement. It still must be approved by the General Assembly.

Six of the nine unions that sued the state agreed to the settlement. The three unions that have not settled represent about 800 employees; their challenge will be addressed by the court after the settlement is implemented. But a trial scheduled to begin this month has been averted. The settlement also relieves the new governor, Gina Raimondo of a major headache as she seeks to address Rhode Island’s struggling economy. In her prior role as the state’s general treasurer, she was the chief architect of the pension overhaul under challenge.

“The state had a very strong case, but Ms. Raimondo said that “to take the litigation risk off of the table is the right thing to do.” The settlement gives financial certainty to employees and retirees, she said, and is affordable for taxpayers. “All of the structural elements of the original pension legislation remain intact,” she said, adding that those elements provide “a fundamental restructuring of the system and fundamentally puts the system in a much healthier position.”

The $14.8 billion pension system was overhauled by the legislature when it created a hybrid plan that split direct contributions between the state and employees. It also suspended cost-of-living adjustments and raised the retirement age by five years, measures intended to save $4 billion over 20 years. Those changes angered public employee unions, which then sued to  challenge the plan as unconstitutional. The unions actively opposed Ms. Raimondo’s candidacy last year for governor.

The proposed settlement has received generally favorable reviews from outside observers. Frank Shafroth, the director of the Center for State and Local Government Leadership at George Mason University, said the settlement appeared to be good for Rhode Island, “because not agreeing to it means the long-term problem gets worse.” Part of the problem for pension systems across the country is that employees are living longer than in previous generations, Mr. Shafroth said, so settlements like this are going to become more necessary. He added that he regarded the Rhode Island settlement “as a very constructive development.” Roger Boudreau, who leads the Rhode Island Public Employees’ Retiree Coalition, told The Associated Press that retirees would not be happy with the settlement because they were getting “a fraction” of what they were promised. But, he added, they knew their chances of prevailing at trial were “very slim at best.”

The perception of continuing progress of pension reform in Rhode Island removes a significant drag on its credit standing. The state still needs to renew its economy after long term declines in its old manufacturing base but the pension issue is a major building block in the establishment of structural balance for the state’s finances.

ILLINOIS LEGISLATURE LOOKS AT CHAPTER 9 FOR CITIES

Illinois statutes don’t currently grant general legal authority allowing for a Chapter 9 filing by municipal entities with the one exemption being for the Illinois Power Agency. A recent hearing was held by the House Judiciary-Civil Law Committee on House Bill 298, sponsored by Rep. Ron Sandack, R-Downers Grove, which would permit local governments to file for Chapter 9 bankruptcy. Conditions allowing for such a filing such as state approval and potential alternatives were also discussed at the March 20 hearing.

The committee heard from representatives of the public finance community and civic organizations who pressed to make new options available for struggling communities and offered an alternative in the form of a new authority to assist local governments solve fiscal problems without bankruptcy. While a bankruptcy provision has not gained much traction with Democrats who control the General Assembly, discussions over whether Illinois should add such a law has received heightened attention since the new Republican governor, Bruce Rauner, proposed the option. Police and fire unions urged against permitting Chapter 9.

Sandack said his bill would require municipalities to first show they truly are insolvent and have made a good faith effort to restructure their debts with creditors. “By sponsoring this bill I am not encouraging municipalities to abandon efforts to regain financial stability on their own. The bill would simply provide municipalities with an additional tool to help them get their financial affairs in order,” he said.

Local governments face big increases in their public safety pension contributions next year due to a prior state mandate to shift to an actuarially required contribution level. There is a school of thought that says that the Governor and others want to give local governments more leverage in negotiating pension reforms. There is also the fact that Rauner has proposed to halve the amount of income tax revenue distributed to municipalities.

The well-regarded Chicago Civic Federation, is supporting a measure to create an authority designed to intervene before a government’s fiscal strains reach crisis stage. The quasi-judicial authority would help local governments deal with pension-related and other fiscal burdens threatening their solvency. The goal would be to avoid defaults and bankruptcy while putting a government on a sustainable path.

Existing law in the form of The Fiscally Distressed City Act is for cities with a population under 25,000. Under its terms, a local government must ask the General Assembly for the appointment of a special commission to consider whether the municipality meets the act’s criteria and if approved it can qualify for state financing assistance.

We would favor a mechanism for more robust intervention and oversight vs. the bankruptcy option. The Detroit experience showed the vulnerability of debt holders under that process and we think that any trend in that direction should be opposed.

CHICAGO ELECTION

A brief word about the Chicago election results which saw Rahm Emanuel elected to a second term. Viewed through the prism of a bondholder, the result has to be viewed positively. While significant financial issues remain for the City, many of the actions for which the mayor was criticized politically – school reform, higher taxes and utility rates, and pension change proposals – were all positive for bondholders. That is not to say that we expect rating stability or improvement but the uncertainty over the direction of city policies over the next four years were a significant drag on the City’s credit which has now been somewhat mitigated.

KANSAS GOES THE PENSION BOND ROUTE

The Kansas legislature approved an authorization for pension bonds as part of its overall budget process. Kansas is now expected to issue $1 billion in bonds to bolster its pension system for teachers and government employees. The Kansas Public Employees Retirement System would receive an infusion of cash, immediately narrowing a long-term gap in funding for retirement benefits. The pension system would invest the money and expects its investments to earn significantly more than the state would pay on the 30-year bonds.

The bill limits the state to paying 5 percent or less in interest to bond investors, and the pension system expects to earn 8 percent annually on its investments the long-term. The state issued $500 million in pension bonds in 2004, paying almost 5.4 percent in interest. The pension system’s investment earnings have averaged 7.7 percent annually since then.

Whether or not the plan is a good budget or credit move is subject to debate because the move also is designed to help with the state budget by decreasing state contributions to public pensions by $64 million over the next two years. The pension system already was on track to close a projected $9.8 billion gap between revenues and benefit costs from now until 2033 under laws enacted in recent years that require increasing state contributions to pensions.

The state must close a budget shortfall projected at nearly $600 million for the fiscal year beginning July 1. The gap arose after lawmakers, at Brownback’s urging, slashed personal income taxes in 2012 and 2013 to stimulate the economy. This would appear to be yet another iteration of borrowing for operating expenses regardless of the academic arguments supporting such debt. The borrowing would not be necessary if sound financial practices were not overruled by ideological zeal.

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