NEW YORK--(BUSINESS WIRE)--Fitch Ratings views Friday's announcement of a potential settlement regarding lawsuits challenging pension reform measures in Rhode Island as a positive indication that potentially costly litigation and fiscal uncertainty could be nearing an end. However, key hurdles remain before it can be implemented.
In 2011, the state legislature enacted the Rhode Island Retirement and Security Act (RIRSA) making extensive changes to state-administered pension systems which reduced long-term liabilities as well as annual funding costs. Unions challenged the constitutionality of the changes in state court, and in early 2013, the presiding judge ordered the state, the retirement board, and the unions into mediation. On Friday, Feb. 14, all parties jointly announced a settlement agreement (SA) that could end the legal challenges to RIRSA, as well as challenges to 2009 and 2010 pension reforms. The settlement must be approved by the individual unions through membership votes, and then must be enacted as state legislation modifying RIRSA. According to Friday's announcement, the unions will vote on the proposal over the next several months, with the state legislature expected to take up the legislation in May. The state's retirement board approved the settlement.
The SA will increase costs for the state and participating local governments, but the vast majority of RIRSA savings appear to be intact. Fitch views positively the certainty provided if the SA is approved by all parties and the litigation ends. Details on the changes to pension benefits and costs are available on a website established for the settlement, ripensioninfo.org. Key components of the SA include changes to cost-of-living adjustments (COLAs) (increased frequency, changes to COLA calculation basis and a one-time 2% COLA payable after SA approval), adjustments to participation in defined benefit and defined contribution plans, and increased employee and employer contributions. Importantly, the litigation and the SA do not affect pension plans administered directly by individual local governments in Rhode Island, which were not affected by the reform.
Based on actuarial data provided as part of the SA announcement, Fitch calculates the SA preserves 94.3% of the combined total reduction in unfunded actuarial accrued liability (UAAL) originally achieved through RIRSA for the state and participating local governments, and increases the post-RIRSA UAAL 4.8% to $5 billion. Under the SA, the state's share of the UAAL (for state employees and 40% of public school employees' liability) increases 4.2% to $3.1 billion while the participating locals' share increases 5.8% to $2 billion. The estimated fiscal 2016 employer contributions to the pension systems increase under the SA by 5% to $509.9 million (4.7% for the state to $292.8 million and 5.4% for participating locals to $217.1 million). The SA will also modestly weaken the funded ratios for the various plans, but they will remain significantly improved compared to prior to enactment of RIRSA.
Fitch's rating of 'AA' with a Stable Rating Outlook on Rhode Island already incorporates the UAAL and employer contribution reductions attributable to RIRSA. The agency does not anticipate taking rating action tied directly to the SA given its relatively modest actuarially projected effect on the state's obligations. Positively, approval of the SA would eliminate one key downside risk for the state's rating. Other factors influencing Fitch's view of the state's credit quality include strong financial management practices, a stabilizing fiscal picture, and weak economic indices.
Additional information is available at 'www.fitchratings.com'.