October 31, 2014
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Fung looks to freeze COLAs, union says plan is illegal

Mayor Allan Fung has rolled out his plan to tackle the Herculean task of municipal pension reform, addressing an unfunded liability that has surpassed $256 million. Fung proposes a 10-year freeze on annual cost of living adjustments (COLA), among other things, which would be enacted through City Council ordinances.

At a Finance Committee meeting on Oct. 25, the committee put off making a recommendation, instead forwarding the ordinances to the full City Council.

But even with council support, local union representatives doubt this plan will get off the ground. Namely, they question its legality. They say the proposal mirrors a legal battle the city undertook in 2003, at which time the unions came out on top.

“Everybody knows these two ordinances are illegal. Even if the city were to do this, the courts would not even allow it to be heard again. It’s the same two parties and the same exact issue,” said Paul Valletta, president of the Cranston Fire Fighters Local 1363, who also serves as the legislative representative for the Rhode Island State Association of Fire Fighters. “Our main issue is the legality of it; it just can’t be done.”

Fung says Cranston is in a different time and different situation than 2003, and that state statute requires the city to take action now. He also points to the 2012 bond rating reports from Moody’s, Fitch and Standard & Poor’s, all of which cited the city’s looming pension liabilities as cause for concern. Fitch called the police and fire plan, which is no longer active, “severely underfunded.” An actuary certified Cranston’s plan as critical status in April of this year.

Under Rhode Island General Laws, cities with locally administered plans in critical status must submit a reasonable funding improvement plan by Nov. 11. Time is running out.

“We are in a different financial situation right now. These improvement plans are required by state mandate for communities defined as critical status, which we are,” Fung said.

If action is not taken, he questions whether Cranston could find itself in a situation similar to that of Central Falls, where some police and fire pensions were cut by 50 percent or more.

Under the mayor’s proposed Reasonable Improvement Plan, not only would COLAs be frozen for 10 years, but they would also be capped at 3 percent compounded raises after the freeze ends. Fung sees this element as particularly important, given the dollar impacts of these annual raises.

“That is the lynchpin of what is in the ordinances,” he said.

For a superintendent of fire alarms, for example, a $26,411 pension increases to $62,495 over a 20-year retirement – a 136 percent increase. Other positions see an even bigger escalation. For a police officer who has been retired for 35 years, their pension swells from $6,293 to $36,406 – a staggering increase of 478 percent.

The plan would also re-amortize for an additional four years – going from a 22- to a 26-year schedule – and make overpayments in the first couple of years to get closer to the annual required contribution. Currently, the police and fire pension plan is only 17.8 percent funded.

That drops to 16.9 percent funded if assumptions recommended in the city’s experience study are taken into consideration. The study recommends that the interest rate be reduced from 8 to 7.5 percent, the mortality table for health and disabled retirees reflect a blue collar adjustment, and that the rates for service retirements be adjusted based on service rather than age.

With these changes taken into consideration, Fung is confident that the city could meet the requirements of these improvement plans, namely that pension plans must emerge from critical status within 20 years.

Valletta doesn’t have a blanket objection to Fung’s ideas, but says that these types of changes can only be realized through collective bargaining. He says union members and retirees understand that something needs to be done to address the unfunded liability and make the pension fund sustainable.

“We’re actually willing to do something through negotiations. He’s never brought us to the office to even hear our ideas,” he said.

Fung and Valletta butt heads on this point. There are only 48 active employees represented by the IAFF and IBPO fire and police unions, and Fung says that Valletta cannot represent the retirees of those groups without written consent.

Valletta says he does have the consent of 136 of the 179 retirees in his union, and that he should be able to represent their interests rather than put the pressure on retirees to organize and secure their own legal representation. Overall, there are 426 retirees participating in the locally administered pension plan.

“In this instance, our opinion is this: if they take these pensions away by ordinance, we can represent them,” Valletta said. “They don’t all want to get out and get 145 lawyers. That’s going to be costly to them. Most of them feel more comfortable with the Local that they’ve been part of. I would be negotiating for them because I know what they’re willing to give up.”

And Valletta assures that they are willing to give things up.

“Everybody knows how this happened – the city just never funded the pension. But we’re by that now. It’s time to fix it now; the blame game is over,” he said. “Our retirees have to be part of this. To their credit, the majority of them are willing to make concessions to their pensions.”

Valletta says that could only happen if the mayor agrees to sit down with retirees as represented by the union.

“I believe we can save this pension problem and if the mayor would meet with us, I think he would be very surprised at what we’re willing to do,” he added.

Fung, though, wants the retirees to either formally get representation or form a steering committee to negotiate with the city. He says that even if the unions make concessions for active employees, it “would not save the system.”

“I’d rather try to work together with the retirees to get something accomplished to ensure they get a paycheck into the future. I’d be a lot more reasonable to negotiate with than a receiver,” he said.

But because that has not yet happened, the mayor plans to move forward, sending his improvement plan to the state for the Nov. 11 deadline.

“We have a statutory obligation to get it up to the state by that time. I’ll do what I can to protect the city’s behalf, but it’s unfortunate that the council can’t see that there are some consequences,” he said, adding that an Oct. 21 reminder letter from the state threatened potential withholdings of state aid if the plan was not submitted by the deadline.

Valletta warns that doing it this way will land the city back in court. The previous case in which the city attempted to alter the pension plans took roughly two years in court.

“That’s two years we could have already been working to fix these pensions. The only ones making money are going to be the lawyers defending this case,” Valletta said.

Jim Kelleher, of Revens, Revens and St. Pierre, attended Mayor Fung’s presentation, and said the city can submit a proposal to the state, and that proposal can then be amended after negotiations. If action is taken on the proposal through council ordinance, however, he believes that the city is setting itself up for disaster.

“I don’t think there’s any question of the legality of it,” Kelleher said. “My perspective is that the city attempted this precise action back in 2003 and it was grieved and arbitrated and ultimately litigated in the Superior Court. A final judgment was rendered deciding that the city cannot take this action.”


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