Rhode Island Supreme Court Weighs In On Providence’s Unfunded Pension Liabilities


Earlier this month, the Rhode Island Supreme Court ruled on a case with significant long-term implications for Providence’s critically underfunded pension system. The court reversed a 2012 city pension reform act, effectively prohibiting cities in Rhode Island from executing pension reform without the consent of pensioners. City leaders voiced their disappointment regarding the outcome, some suggesting that the city may have no choice but to consider declaring bankruptcy. 

Providence’s pension system, which serves over 3,200 retirees, has been a subject of great concern for policymakers for decades. The City’s retirement fund remains only 26.3% funded, with its unfunded obligations exceeding $1.3 billion. As of November 2019, Providence’s pension fund, along with 20 other municipal plans across the state, sat in “critical” status. According to Rhode Island General Treasurer Seth Magaziner, pension funds underfunded by at least forty percent receive this classification. 

In 2011, Providence’s then-Mayor, Angel Taveras, pushed for city-wide reform to recover from what he referred to as “pension abuse.” Mayor Taveras believed Providence could save $16 million annually by freezing COLAs. Cost of living adjustments, or COLAs, change a pension recipient’s monthly retirement benefit to account for increasing prices and to ensure that their purchasing power remains the same. In Providence, however, generous COLAs contributed to the city’s looming economic collapse. The most frequently used example of Providence’s generous COLAs is Fire Chief McLaughlin, who retired in 1992 with a tax-free disability pension when his salary was $63,500. He received a compounded 6% COLA and, by 2013, his pension soared to $196,800. 

Mayor Taveras’s administration passed an ordinance that suspended cost-of-living adjustments until Providence’s pension fund reached a 70% funding level. Taveras argued the freeze was only a temporary change to the pensions of public employees. Retiree groups and unions agreed to a 10-year suspension, however, the fund was not projected to reach the targeted level of funding until 2036. A lower court ruling previously upheld the freeze, until earlier this month when the Rhode Island Supreme Court presided over the case. 

The Court ruled 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 changes are agreed upon by pensioners. The majority opinion was written by Chief Justice Suttell, who concluded that each plaintiff definitively proved that they were entitled to the full benefits they were promised by the city. Additionally, the court decided that the suspension of COLAs could not be considered temporary because, according to William B. Fornia, an expert in actuarial science as it relates to municipal pensions, testified that over half of the plaintiffs whose COLAs were frozen will have died by the time the retirement system achieved 70% funding. Following the Supreme Court’s decision, Fire Chief McLaughlin and others with high earning COLAs could potentially receive huge payouts. 

City leaders voiced their disappointment about the decision and their concerns for the financial security of Providence. City Council President Sabina Matos released a statement expressing that “the outcome of today’s Rhode Island Supreme Court decision is at a minimum disappointing. At a time with so much fiscal uncertainty, this decision augments the need to be creative with our pension obligations while not sacrificing the City’s duty to pay debts and provide basic needs and services.” Providence Mayor Elorza also warned about the decision’s implications for the good of Providence and the sacrifices that the City now expects to make. He wrote: “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. 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.” City officials urged other Providence leaders to think creatively in their suggestions for expanding revenue streams, given that the wellbeing of the City hangs in the balance. 

The decision will immediately cost Providence several million dollars in payouts. In the future, public employees will be able to cite this case as a precedent to prohibit changes to their pensions and city leaders are now barred from unilaterally executing changes to the pensions of current and former city workers. Whereas the original reform saved millions, the City of Providence must now decide whether to declare bankruptcy as its only escape from mounting debt. City leaders certainly face pressure to devise a solution as quickly as possible.

Enacting larger reform to implement a more responsibly-managed retirement system will be essential to Providence’s recovery and the financial well-being of its public employees for decades to come.