Moody’s praises Providence for paring back pension benefits

The Providence City Council may be uncertain about the pension changes it just passed, but Moody’s isn’t.

“The ordinance is a credit positive because it provides current and future year budgetary relief to the financially strained city, although labor unions are likely to challenge the new law since it conflicts with existing collective bargaining agreements,” Moody’s analysts Susan Kendall and Geordie Thompson wrote Tuesday in a note to investors obtained by WPRI.com.

The pair described the pension overhaul as another sign that Mayor Angel Taveras and the City Council are taking difficult steps to avoid bankruptcy, saying it “demonstrates city management’s strong willingness to cut its long-term obligations despite resistance from employee groups and the threat of litigation.”

They also noted that last week Taveras reached deals with tax-exempts Brown University and Lifespan for an additional $33.9 million worth of payments over the coming years, which the administration “projects … will bring its 2012 and 2013 budgets into balance, although its reserve position and liquidity will remain weak.”

Local judges are a major concern for Moody’s. The analysts singled out R.I. Superior Court Judge Sarah Taft-Carter’s February decision barring Providence from moving retirees to Medicare as a key cause of its renewed fiscal distress in recent months, and said the outcome of any pension litigation will be significant.

“Providence’s ordinance marks the first time that a Rhode Island local government has altered existing contractual agreements with retirees outside of Chapter 9 bankruptcy,” which Central Falls used to make changes, Kendall and Thompson wrote. “If the ordinance survives a legal challenge, many other Rhode Island local governments may pass similar actions that reduce benefits to manage their own significant fiscal stress.”

“A large proportion of Rhode Island local governments are facing fiscal stress related to growing pension benefits,” they added. “The ability to alter pension benefits outside of bankruptcy would be a significant tool for municipalities to balance financial operations. This could also reduce the growing need for state intervention.”

The General Assembly is currently considering a package of bills proposed by Governor Chafee and backed by most local leaders that would allow troubled city and town governments to reduce their expenses, notably by freezing cost-of-living adjustments (COLAs) if their pension plans are underfunded.

Woonsocket, Providence and Central Falls face by far the largest combined pension and debt liabilities as a share of their property tax bases, according to this accompanying chart from Moody’s.

• Related: Moody’s joins Fitch, cuts Providence’s bond rating over budget (March 27)

(chart: Moody’s)

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