(Bloomberg News) Providence, Rhode Island's biggest city, will halt cost-of-living increases for retirees among steps to overhaul a $422.8 million pension system and avoid becoming the state's second municipal bankruptcy.
Less than three months after Mayor Angel Taveras said Providence stood on the "brink of bankruptcy," the City Council yesterday voted 13-0 for changes that save almost $19 million a year, partly by capping benefits, according to Jake Bissaillon, the council's staff chief. While Taveras backs the overhaul, Paul Doughty, who leads the local firefighters union, called it "a huge mistake" that will be challenged in court.
"These reforms have overwhelming support from the community, business leaders and the Local 1033 Laborers union," Taveras said, referring to a municipal workers' union. In a statement after he signed the measure at City Hall following the council vote, the mayor described the overhaul as "a big step toward the necessary structural changes we must make."
Rhode Island, which had the ninth-highest jobless rate in the U.S. in February, authorized a similar overhaul of the state pension system last year, suspending cost-of-living increases and raising retirement ages for government workers and teachers. Retiree benefits have been in the spotlight since August when Central Falls, the state's smallest city, declared bankruptcy after being overwhelmed by pension promises.
Banking On Cuts
Providence is banking on the cuts to help balance its fiscal 2013 budget. Ending cost-of-living increases of as much as 6 percent a year for some retired public-safety workers will save $15.6 million, according to a council report. Taveras said that one former fire chief who earned $63,510 the year he retired collects $196,813 annually now and that there are at least 25 city pensioners whose annual payments top $100,000.
The increases may resume once the retirement system has enough assets to cover 70 percent of promised benefits, according to the measure. Testimony at council hearings on proposed changes put the current funding level at 34 percent.
Another element of the overhaul caps pensions at 1.5-times the state's median household income, although no savings estimate was provided in the report. The city pension serves 3,000 retirees and another 2,000 current workers, including police and firefighters, said David Ortiz, a Taveras spokesman.
Cutting Unfunded Liability
The overhaul will reduce Providence's unfunded liability of about $900 million by more than $240 million, according to the council report. The larger figure represents the difference between what the city has set aside to pay for promises to retirees and the estimated cost of those future benefits.