PROVIDENCE, Rhode Island (Reuters) - Top Rhode Island finance officials on Thursday blasted representatives of the town of Coventry who have sought to avoid making up a $24 million shortfall in one of their pension plans.
The town’s position not to offer a way to make up the almost 70 percent shortfall in a plan for non-teacher school employees is “unconscionable,” said Richard Licht, director of the Rhode Island Department of Administration, at a meeting of the state’s Pension Plans Study Commission.
Many current employees are contributing to the pension plan, but will not receive any benefits, said Mark Dingley, general council to state Treasurer Gina Raimondo.
“One of the injustices here is that people are contributing to the plan now and ... will get a zero benefit,” he said.
“I can’t accept that,” Licht added, as discussion at the meeting frequently turned heated. “That’s really wrong.”
Coventry, a town of about 35,000, believes it is not legally responsible for the retirement fund for more than 300 active and retired janitors and other non-teacher school employees. The plan is on track to run out of cash in 12 years.
Town officials claimed that overlooked language in a 1977 labor contract absolves it of responsibility.
“It’s not a legal responsibility of the town to take total responsibility,” town manager Thomas Hoover said at the meeting.
“We feel as though we have no responsibility for the underfunded portion of this plan,” said Gary Cote, president of the Coventry town council.
If forced to take responsibility, the town could be forced “down the road to receivership and bankruptcy,” he added.
The case, which may end up in court, could cut a new path for other cash-strapped U.S. municipalities as they re-examine contracts to find relief from ballooning public pension costs.
State and local governments face unmet pension fund obligations of as much as $4 trillion according to some studies, possibly jeopardizing their ability to provide essential services and meet their debt service payments. Moves by Coventry and a few other towns around the country have sparked fears in the municipal bond market that the situation could unravel.
The review of Coventry’s pension funds was prompted by a 2012 Rhode Island law overhauling the state’s retirement system. The law also created the local pension study commission, which set deadlines for cities to review and improve pensions that were in “critical” condition, or under 60 percent funded.
Two dozen other municipalities in Rhode Island with underfunded pension funds have submitted plans to the commission, Licht said.
Coventry’s teachers are covered under a separate Rhode Island plan into which the town makes payments. In that case, the town has no choice but to contribute its full share under a state mandate or risk losing state aid.
Rhode Island began aggressively intervening in local government finances when the tiny city of Central Falls was going bankrupt in 2011, largely because of pension obligations.
By the end of that painful case, retirees’ pension payments were slashed in half, but bondholders escaped unscathed after state legislators passed a law to protect its reputation in the $3.7 trillion U.S. municipal bond market.
Usually, U.S. cities and states attempt to contribute the amount of money an actuary says they should pay each year. But the Coventry school committee’s 1977 collective bargaining agreement with support staff only calls for it to pay 12.75 percent of payroll into the pension, which it has been paying. That is where the town believes its responsibility ends.
In 2012, Coventry’s school department budgeted for a $600,000 payment into the fund, 29 percent of the nearly $2.4 million that actuaries said it should have paid and less than 1 percent of its revenue. The employees themselves contributed 8 percent of payroll, or about $364,000
Reporting by Aaron Pressman.; Additional reporting by Hilary Russ in New York. Editing by Andre Grenon