By Scott Malone
BOSTON, Feb 26 (Reuters) - The city of Providence, Rhode Island, on Tuesday sued a unit of Xerox Corp, saying it had underestimated by about $10 million how much the city would save when it renegotiated its pension benefits last year.
Providence charged in court papers that as it negotiated the terms of changes to its pension benefits with workers and retirees in 2012, the Buck Consultants arm of Xerox failed to account for a cost-of-living adjustment paid to retirees during the negotiations.
The error will cost the capital of the smallest U.S. state, which narrowly avoided bankruptcy last year in part due to Mayor Angel Taveras' deal to cut its pension obligations, some $10 million over 28 years.
Providence faced about $900 million in unfunded pension obligations when it entered the negotiations and had expected to cut that liability by about $165 million through the pension deal, the city said in papers filed in U.S. District Court in Providence.
Cash-strapped U.S. cities and states collectively face about $5 trillion in unfunded pension obligations. Last week Michigan declared Detroit in financial crisis, in part because of its difficulty in meeting pension obligations.
Providence said it relied on Buck's advice in renegotiating its pension terms.
"Had the city known that Buck's calculations were simply wrong, the city would never have agreed with its union employees and retirees to the pension modifications to which it is now bound," it argued in its lawsuit, which seeks unspecified monetary damages.
The city charged that when first confronted with the error, a Buck employee admitted the mistake but that other company executives later backtracked.
A Buck spokesman declined to comment on the lawsuit.
"We have yet to be served with a lawsuit, so it would be inappropriate for us to comment at this time," spokesman Steven Laird said.
Providence avoided bankruptcy last year after cutting deals with its unions, including the pension reduction, and reaching agreements with nonprofit institutions located in the city. For example, in one deal Brown University agreed to raise the payments it makes to the city budget in lieu of property taxes.
Providence's northern neighbor, Central Falls, filed for bankruptcy in 2011 and emerged late last year after it worked out a plan to lower its long-term debt.