Backstopping and Insulating Local Pensions via Legislation

The Current is still waiting for answers from the Department of Revenue, the General Treasurer’s office, and Senate President Teresa Paiva Weed with regard to S2955, which Sen. Elizabeth Crowley (D, Central Falls, Cumberland, Pawtucket) submitted last Thursday.  Over the weekend, Sen. Crowley told the Current that the language came from the Department of Revenue.

The legislation would bring retirees currently in Central Falls’ locally managed pension system into the state Municipal Employees Retirement System (MERS).  It would also allow cities and towns that enter into the state’s fiscal oversight process to transition their retirees into MERS.

Especially notable among the question marks is a section of the law, 45-21.4-5, that would remain “reserved.”  That section corresponds with one created in similar House legislation (H7967) that Rep. James McLaughlin (D, Central Falls, Cumberland) submitted in March to address the Central Falls pensions.  In McLaughlin’s bill, the language sets a “maximum reduction” of 55% for retirees and calls for their return to 75% of their July 31, 2011, pension payments upon expiration of the settlement agreement that the bankruptcy court for Central Falls approved earlier this year.

That agreement, which Central Falls Receiver Robert Flanders provided to the Current yesterday, is set to expire on July 1, 2016.  It also requires the director of the Dept. of Revenue to advocate for a one-time payment from the state of “between $2,000,000 and $2,636,932” in order to limit pension reductions to 25% (that is, 75% of prior payments).  Corresponding legislation has been submitted as article 28 in the FY13 budget now under review in the House.

Retirees would receive supplemental payments in July of each year until the agreement’s expiration.

As Andrew Morse has explained in analysis on Anchor Rising (of which this author is administrator), the combined effect of the agreement and the related legislation will be that the pension reductions will never have dipped below 75% of their prior amount.  In the early years, the payments amount to “a state bailout of the Central Falls pension system.”  Thereafter, presumably, Central Falls would resume full responsibility.

The other notable variable, however, is a reference in Crowley’s bill to “Appendix E-A” of the settlement agreement.  Neither the file provided by Receiver Flanders nor the document included with the bankruptcy case contains any reference to such an appendix.

Morse expresses the broader concern that the deal provided to Central Falls will establish a precedent for other cities and towns.  Municipalities are just beginning the process of reforming their pension systems, all of which are arguably underfunded.

If enacted into law, S2955 would create a protective wall around pensions.  By empowering the state to withhold aid to cities and towns that do not adequately fund plans under the MERS umbrella, it would increase their weight in any local list of priorities.  If the legislation is modified, on its way to passage, to extend Central Falls-like maximum cuts to municipalities entering the system, it would further increase the pressure on other local expenditures and tax rates.

S2955 has been scheduled for hearing by the Senate Committee on Finance, this Thursday.  H7967 has yet to be placed on a committee calendar.

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