Congressman David Cicilline is supporting his successor Mayor Angel Taveras’s push to wring more money out of Providence’s retirees and tax-exempt institutions.
“David believes the mayor is absolutely right that the 4%, 5%, and 6% compounded COLAs given in the 1990s are completely unsustainable,” Cicilline spokeswoman Nicole Kayner told WPRI.com in a statement.
Those COLAs, “coupled with the increasing share of property owned by non-profits and exempt from taxation, continue to pose major challenges to the city,” she said.
Kayner didn’t comment directly on Taveras’s warning that Providence is “on the brink of bankruptcy,” but defended Cicilline’s work as mayor from 2003 to 2011, saying he “made progress on both of those issues but there is more work to do and he has great confidence the mayor will get it done.”
Mike Stanton and Tom Mooney have a solid story in today’s Projo about the challenge Mayor Taveras faces in trying to claw back those hugely expensive pension COLAs granted back in 1989. What many people don’t seem to understand – including some powerful folks at the State House – is that Taveras can’t hammer out a deal with the unions because the unions don’t represent the retirees.
That’s not my opinion – it’s the Rhode Island Supreme Court’s. Here’s how the city explains it (emphasis mine):
The Rhode Island Supreme Court stated in Arena v. City of Providence, 919 A.2d 379, 389-390 (2007) that (a) the plaintiff retirees were not members of or represented by unions; (b) the plaintiff retirees are retirees and, as such, cannot be treated as employees as the United States Supreme Court found in Allied Chemical v. Pittsburgh Plate Glass, 404 US 157 (1971); and (c) the plaintiff retirees do not share a “community of interest” with active union members as current union members and retired members could have adverse interests. Note that these assertions were within the context of the Firefighters union attempting to “arbitrate” the COLA fight with the City. If the Court found the retirees to be union employees, the COLA benefits would have been arbitrable. The Court did not find the retirees to be union employees nor represented by the union and, as such, the dispute was not arbitrable.
Judge Flanders ran into exactly the same problem in Central Falls, which is why he had to send letters to all the retirees asking them to agree to concessions. (They didn’t, and he filed for bankruptcy.) Paul Doughty, the firefighters union president, says Taveras should still try and ask the retirees for voluntary concessions.
But long story short, if you hear someone say “Providence needs to sit down with the union” to figure out a solution to the pension problem, they’re either being disingenuous or just don’t understand the issue.
That’s the takeaway from an excellent bit of analysis by Jason Becker. ”A true COLA is key to ensuring that purchasing power is maintained throughout retirement,” he writes. “But the cost of goods has not increased 5% or 6% year-over-year ever in the past twenty years.”
Becker ran the numbers to compare what a Providence retiree with a $25,000 pension as of 1992 now receives thanks to 5% or 6% annual compounded cost-of-living adjustments, versus what the same retiree would now receive with a true COLA tied to inflation. Here’s what he found:
Inflation-tied COLA: $46,132
5% annual COLA: $63,174
6% annual COLA: $75,640
Treasurer Raimondo made a related point at Tuesday’s local pension workshop, saying it’s important for pension plan fiduciaries to figure out what they’re actually looking to provide their retirees. Before last November’s new law, ”the Rhode Island retirement system was designed to provide an employee with more income at retirement than they got when they were working,” she said. “Is that retirement security?”
A veteran union activist traveled to Washington on Thursday to slam Treasurer Gina Raimondo and other Rhode Island leaders for taking away the annual cost-of-living adjustment to her pension.
“I’m angry. Yes, I am angry,” Dolores Bresette, a 37-year state employee who is now retired, said during a panel with other officials and economist Dean Baker at the National Press Club. “I’m angry that something like this could happen after I worked all of these years and planned for my future.”
Bresette retired on Sept. 27, 2008, and received $2,305.54 a month as of June 30, records show. ”My pension is my life savings,” she said. “The politicians in Rhode Island simply took it from me. On the news, I saw them celebrating. It’s upsetting that they could do this to us. They don’t see us as people. They see us as a number.”
North Carolina Treasurer Janet Cowell, who spoke before Bresette, countered that her state does not grant automatic COLAs and sets its pension fund’s investment return forecast at 7.25%, still lower than Rhode Island’s revised 7.5%. North Carolina has made its full pension contribution in 69 of the past 70 years, Cowell said.
To see the impact, look at former Fire Chief Gilbert McLaughlin, whose COLA has boosted his tax-free accidental disability pension by about $30,000 in the last three years alone, from $155,892 in 2008 to $185,672 now, records show. It’s estimated Providence’s pension fund has paid McLaughlin more than $2 million since 1992.
McLaughlin, a Warwick resident, is 75 years old in 2011. His annual pension will be $208,618 when he reaches age 77; $313,685 when he’s 84; $419,781 if he lives to be 89; and $796,871 if he makes it to the ripe old age of 100, estimates by WPRI.com show.
At that point, McLaughlin would have received roughly $13 million in pension benefits since his retirement.
The pension overhaul approved Thursday night by the finance committees would suspend Rhode Island retirees’ cost-of-living adjustments (COLAs) for years – but not until 2013.
That’s because the bill’s provisions all take effect on July 1, 2012, and COLAs are added to retirees’ pension benefit every January, so one final increase would be granted at the start of next year, before the COLA freeze begins.
“Pension benefits are issued in arrears at the end of the month,” according to the most recent edition of the Employees’ Retirement System of Rhode Island Handbook.
Treasurer Gina Raimondo’s spokeswoman Joy Fox confirmed a COLA will be granted in January even if the Raimondo-Chafee bill becomes law. Under its provisions, retirees would keep whatever benefits they have as of June 30, 2012, so the amount they receive next January is what they will keep receiving as long as the freeze lasts.
The January 2012 COLA will be based on the current formulas, not the new one tied to the pension fund’s investment returns. The COLA was 3% compounded until late 2009, then changed to either 3% or the inflation rate, whichever is lower, in some cases capped at $35,000. Social Security checks are rising 3.6% in January.
In the debate over the Raimondo-Chafee pension bill, most of the discussion around cost-of-living adjustments (COLAs) has focused on the proposal to suspend them for up to 19 years to restore the funds’ financial health.
Less attention has been paid to another aspect of the bill: the new way COLAs would be calculated and awarded. Basically, the increases would now be granted only when the pension fund performs well, not based on an increase in inflation.
The new COLA would increase the first $35,000 of a pension by up to 4% in good years and not at all in bad years. The COLA would be equal to any increase in the pension fund above 5.5% – so, for example, a 6% increase in the fund would mean a 0.5% COLA, an 8% increase would mean a 2.5% COLA, and a 9.5% increase would mean a 4% COLA (the maximum allowed).
Critics note the new COLA won’t reflect the rising cost of living but rather the health of the financial markets. Raimondo says that’s necessary to protect the overall system. “The state of Rhode Island will never again pay a COLA that it cannot afford,” she said Oct. 19.
It turns out the new COLA formula proposed by Raimondo and Chafee isn’t unique. An investment-based COLA has been used since 2007 in The Netherlands – a nation that isn’t exactly a right-wing dystopia – where it’s known as “conditional indexation.”
One argument made by state Sen. Frank Ciccone and other opponents of the Raimondo-Chafee bill’s extended freeze on cost-of-living adjustments is that lawmakers may rob Peter to pay Paul, as impoverished retirees wind up on the rolls of state welfare programs.
But that concern is a red herring, according to Linda Katz, policy director at The Poverty Institute, which advocates for spending programs that assist low-income Rhode Islanders.
For the vast majority of state pensioners, “their income is all too high” to qualify for benefits provided to lower-income Rhode Islanders, Katz told WPRI.com.
The average Rhode Island state worker’s retirement income would drop from $52,000 to roughly $39,000 over the course of a 19-year freeze on cost-of-living adjustments, estimates by the state’s actuary show.
While the dollar amount of a retiree’s pension check would not change over the course of the 19 years, the continuing rise in the cost of living would slowly erode how much the benefit can buy. That reduces its value in practice, though not in nominal dollars.
The average state worker who retired over the last three years earns $52,000 a year in retirement, with a pension benefit of $33,000 and a Social Security benefit of $19,000, according to the charts shown below, presented by actuary Joe Newton of Gabriel Roeder Smith & Co. to the pension advisory group in September.
Can Rhode Island’s lawmakers change pension benefits for workers who are already in the system?
It’s a huge legal question, and the answer could determine what the state does to address its pension-funding crisis. A state lawsuit filed last year – and scheduled for a hearing this month – should provide some clarity, though further legal challenges seem almost inevitable.
Rhode Island is one of many cash-strapped states grappling with the question. This week, judges in Colorado and Minnesota both dismissed court challenges to pension cuts made by retirees – and although decisions in one state don’t bind judges in another, The New York Times reports they could still have an impact:
The two court decisions, issued Wednesday, suggest that the legal tide may be changing for public pensioners. …
[I]n his ruling dismissing the Minnesota case, Judge Gregg E. Johnson of the state’s Second Judicial District Court wrote that the retirees in that state “have not met their burden to show unconstitutionality beyond a reasonable doubt.”
Judge Robert S. Hyatt, a district judge in Denver, offered a different line of thinking, noting that the 2010 state law that cut the benefits did not actually allow the state to remove money from the pension fund and use it to balance the budget. …
[Hyatt] also drew a distinction between a base pension and a cost-of-living adjustment, often called a COLA. He suggested that the inflation adjustment could be reduced, but the base pension could not. …
The three cases [including another in South Dakota] have been closely watched as bellwethers.