Attorney argues: Balancing school budget on pension illegal

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A controversial mediator’s decision that concluded the city did not need to provide more funding to the Warwick School Department to close its budget deficit for the fiscal year ending June 30 – and seemed to instruct the department to take up to $4 million from its private pension fund in order to do so – would violate federal law if implemented, according to a legal opinion released by the schools on Wednesday.

The opinion was concluded by attorney Cory Bilodeau, partner at McLaughlin Quinn LLC, and sent to the Warwick School Committee Chairwoman Karen Bachus on Friday, May 24.

In the letter, Bilodeau concludes that taking money from a pension fund and infusing it back into the operating budget of the pension operator would be in violation of the Internal Revenue Code of 1986, and would result in federal tax consequences and other penalties if implemented, including but not limited to the fund losing its tax exempt status and the incurring of fees and other financial penalties, which would cause significant financial harm to pension beneficiaries and the school district.

“The Withdrawal cannot be made without incurring ‘financial penalty or adverse tax consequences’ as discussed in the Decision,” the letter concludes.

The letter references a previous, similar case that occurred in Rhode Island in 1991, where the state attempted to withdraw about $20 million from the state’s pension fund to cover a budgetary shortfall. The IRS determined in that case the withdrawal violated the Internal Revenue Code, and Rhode Island was forced to repay the $20 million – with three year’s-worth of interest at 8 percent.

“If the School Committee proceeds with the Withdrawal in violation of Code § 401(a)(2), it is likely that any corrective action taken thereafter would require repayment of the Withdrawal with interest,” Bilodeau wrote.

A tangled web

At the root of the issue is an emerging battle of semantics that came to head during Tuesday night’s budget hearing, where the school department was questioned for the better part of four hours about, among many other issues, their contributions to the pension fund that have since come under significant scrutiny as regularly being above the annual recommended contribution (ARC).

To recap, the schools were set to pursue a lawsuit against the city to seek approximately $4.9 million in additional funding they felt they were owed by the city to properly fund their budget, which was filed shortly after Christmas in 2018. However, in an attempt at renewing positive negotiations, the newly installed school committee dropped the suit and the two sides began binding mediation sessions in February.

Those sessions were ongoing until May 1, when mediator Vincent Ragosta penned his decision that the city would not be responsible for any additional funds to the school department. That decision, he wrote, was based on financial testimony received by the city and an analysis of financial data provided by the schools – including a finding from accounting firm Marcum LLP, working on behalf of the city, that the schools had contributed about $4.1 million above the ARC since 2014 towards their pension fund.

Council President Steve Merolla, and Ragosta in his award, contend that all sides were in agreement of the plan to use the pension funds to cover the shortfall.

“While some may view the WSC’s [Warwick School Committee’s] overabundant payments to bolster the sustainability of its Retirement Plan as laudable, during the April 29 mediation session, the Parties agreed that the WSC’s largesse must now be tapped from the $53 million of Retirement Plan assets to provide adequate funding for fiscal year 2018-2019,” Ragosta wrote in the mediator award. “The WSC claimed a need of $4 million for such adequate funding.”

“When we walked out of that meeting, was there anybody in that room on the school department side or the city side that didn't agree on the outcome of that mediation?” Merolla asked Kyle Connors, director of assurance at Marcum LLP, who conducted financial analysis for the city during mediation.

“It felt as though everyone was in agreement,” Connors said.

However, school finance director Anthony Ferrucci said on Wednesday that this was not actually the case.

“Our position was that we understood the decision,” he said. “I’m not an attorney but the room was full of attorneys. Somebody should have known there was a state legal decision made years ago that would have predicated that an employer can't take money out of a pension plan.”

Who said what?

However, those on the city side allege that Ferrucci had indicated during mediation questioning that he had utilized similar pension fund withdrawals in the past without fees or penalties incurred.

Ragosta wrote in the award that, “at the April 29 session the WSC represented to the City and the mediator/arbitrator that there shall be no financial penalty or adverse tax consequences attached to any such withdrawal of assets from the Retirement Plan, and that such is legally permissible. This representation was made in the presence of all of participants to the mediation/arbitration, including the Parties’ respective legal counsel and financial experts.”

However, Ragosta was also sure to include the following language as well:

“No legal or regulatory authorities were cited by the WSC to support this representation, nor has the mediator/arbitrator been charged to vet its accuracy or legality.”

Merolla asked Ferrucci to clarify his position at the mediation sessions during Tuesday night’s hearing.

“In mediation you had mentioned you had taken money out previously of the pension with no penalty, can you follow up on that?” he asked.

Ferrucci contends that he was asked, broadly, whether there have been scenarios in the past where money was taken out of the pension fund and re-allocated without penalties or fees being incurred.

The answer, he told Merolla on Tuesday night, was yes, but only in two specific scenarios: 1.) When pension beneficiaries receive a pension check into their account, which necessitates the sale and redistribution of pension stock assets to do so; and 2.) When a Warwick Public School employee terminates their employment prior to 10 years and either receives their full pension contribution, plus the schools’ match, in a wire transfer or it is transferred to their new retirement plan.

“Have we ever taken money back as the employer?” Ferrucci said. “Never.”

Merolla, clearly frustrated with Ferrucci’s explanation, followed up.

“So, the very subject matter that we were talking about, which is how do we fund these changes, didn't cross your mind? You were just talking about that you could withdraw $4 million for some other reason that wasn't germane to the topic that we were talking about?” he said.

“Again, I'm not an attorney, so I didn't offer an opinion,” Ferrucci answered. “I was asked specifically and I answered specifically.”

Ragosta followed up with a response to the letter opinion on Tuesday morning, saying that his mediator award “did not order the Committee to withdraw funds from the Plan. Contrarily, the Decision was a ruling in favor of the City, relieving it of any further obligation to fund the Committee's budget for the fiscal year at issue.”

Ragosta reiterated his assertion that Ferrucci had indicated withdrawing funds from the pension account would not result in penalties, and that the school committee had agreed to do so.

“Mr. Ferrucci made those statements in a joint session of all participants to the mediation in response to pointed questioning by the City,” he writes. “However dubious those representations may have been, they were nonetheless plainly made. Moreover, there was agreement by the Committee that the Plan's funds would be accessed.”

Ferrucci said Wednesday that he was disappointed that the council seemed more focused on the pension issue during Tuesday night’s budget hearing, and didn’t address the need for next year, which regardless of what happens to conclude this budget year, still poses an immense challenge.

“Whether we take the $4 million out, or if we choose not to take the $4 million and we end in a deficit, that's a whole other issue to deal with,” he said. “I'm just disappointed we didn’t discuss more about what we can do next year.”

Superintendent Philip Thornton said that what happened next in the ongoing issue is yet to be seen. Mayor Joseph Solomon said on Wednesday that Ragosta would have to be involved, but Ragosta indicated he is out of state until the week of June 3 attending to personal matters.

"We'll have to work through that," Thornton said. "As of today, this is information that's out there and we have to see what's next."

Comments

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Hillsgrove Hal

Where were the city lawyers in all of this?

Why didn't Solomon and Merolla get their own legal opinion about this plan?

They and other council members have been making hay about school officials not being trustworthy -- and yet they trusted school officials on this?!

Solomon and the city council rushed to have a politically favorable deal in place -- and now it's been shown to be illegal.

The fact that they're apparently protected from a Caruolo lawsuit is good for the city council, I guess -- but it's small consolation when the school department still has to close a $4 million deficit within the next month.

One way or another, taxpayers will wind up paying for this.

(Going by some of the testimony at this week's budget hearings, there's apparently a lot of money left in the paving budget...)

Thursday, May 30
had enough

Bankruptcy is the only solution. The State Legislature has tied the hands of Mayors with the new sun setter law on union contracts. This removed all incentives for the unions to negotiate. They are guaranteed 3% raises and the same benefits for life without ever having to negotiate a contract again. Why would they ever negotiate a new contract, they have nothing to gain and plenty to lose. The only way out from under these current unsustainable contracts is bankruptcy.

Thursday, May 30
Daydreambeliever

had enough,

Your an idiot pay attention to what goes on they ARE NOT guaranteed any raises not even .1% they continue to negotiate and follow the contract that just expired.

No guaranteed raises are allowed !!!

Wow some people just can’t process anything!

As for bankruptcy again research it everyone wants an easy fix and if you think that’s the answer your sadly mistaken.

My house went up also in value and taxes followed suit get over it. If you don’t like it here move to another affordable city if there is one in Rhode Island.

My gosh bitch bitch bitch.

Thursday, May 30
had enough

They follow the terms of the last contract until a new contract is signed. The last teachers contract called for a 3% raise in the final year of the contract. When there contract expires in 2020, if no new contract has been agreed upon, they will receive a 3% raise in September 2020 and 2021 ...........

Thursday, May 30
Daydreambeliever

As for bankruptcy and closing fire stations think it through.

The home you own now with its value will depreciate by 1/2 so that profit you have if you sell now is long gone and evaporated.

You will owe more than it’s worth.

Go ahead close fire stations and now your homeowners insurance on your depreciated house goes up because they go by the closest hydrants, main size and response time from a FD. If it takes longer meaning just minutes your insurance goes up. Call your insurance agent if you don’t believe me. It also depends if it’s a volunteer department. So much goes into it but everyone’s answer is file bankruptcy.

My house went up in value $40k so yes I’ll pay more also but it’s in the buyers market area where it will go in a week.

I’ve had 3 friends in the last month sell there homes in the $225-$285 range and guess what? They all got above asking price !!!!

I have another friend who’s selling at $400k and guess what no nibbles.

If I were you I would sell now get out of dodge make a profit rather than have your house worth $100k with bankruptcy.

Thursday, May 30
Daydreambeliever

Your wrong had enough. Is the FD gettingbraises with no contact that expired last June 30, 2018???

No they aren’t only the signed contracts get honored.

Thursday, May 30
Daydreambeliever

Your wrong had enough. Is the FD gettingbraises with no contact that expired last June 30, 2018???

No they aren’t only the signed contracts get honored.

Thursday, May 30
had enough

I am not talking about the fire department, it is unfortunate for them their last year called for no raise so they will not get a raise until a new contract is agreed to. This article is about the teachers contract and I clearly stated that I was referring to the teachers.

Thursday, May 30
Jimmy

Had Enough,

You are 100% wrong. Contractual raises are tied to dates 7/1/18, or 1/1/18 etc. there is no contract that gives perpetual raises. If a contract expires NO ONE GETS A RAISE. Please do some research

Thursday, May 30
can't believe it

Did you hear Bachus make her rambling presentation ? What a disgrace.... Did you note that Merolla had to gavel down the loudmouth Bachus screaming from the crowd. Nothing new for those of us who had to put up with her temper tantrums at school committee meetings.

It is ludicrous that Bachus is asking for more money. She was the antagonist in the previous school committee that she demeaned so pointedly last Monday night.

Do the city a favor and resign Karen because you are unqualified.

Thursday, May 30
Daydreambeliever

I was making a point had enough that when a contract expires no union member gets a raise. They follow the provisions of the expired contract but no raises are given until an agreement is made.

I only mentioned the FD as they are working without a contract and have been for a year and they haven't received a raise to prove a point.

I do agree we downsize schools, teachers, we have less students attending and we should see savings but we dont. Every year they come back asking for millions.

Thursday, May 30
Scal1024

Jimmy and had enough, to clarify this issue a bit this was taken right from the Evergreen bill that was just passed and signed into law by the Governor:

"All contractual provisions related to wages and benefits contained in the collective bargaining agreement, except for any contractual provisions that limit layoffs, shall continue as agreed to in the expired collective bargaining agreement."

If you didn't get a raise last contract, you won't get one if negotiations stall and the contract expires. If you happened to get a 3% raise last contract, you will recieve a 3% raise if negotiations stall and the contract expires.

Thursday, May 30
Jimmy

Scal,

That is not true. Like I stated before if you read any contract it states that raises are tied to a date. The fire contract had a 1.5% raise on 7/1/18. They are NOT getting a raise on 7/1/19. There are no contracts that offer raises in perpetuity. Once ANY contract ends there is no raise given until new contract is negotiated.

Friday, May 31
ThatGuyInRI

I've had enough too, enough of people who don't know what they're talking about.

The "sunset clause" of a contracts continues the working terms of the contract. Any pay raises are on an annual basis.

For example, if a contract calls for a raise of 3% in 2019 and 3% in 2020 and 3% in 2021, those raises are for those years specifically. It does not call for a 3% raise ad infinitum, it is for those three SPECIFIC years.

So if a contract expires, without being renewed, the TERMS of the contract continue until a new contract is signed. It continues at whatever the pay rate was in the last year of the contract. Therefore, if the sunset clause continues, the workers get a 0% raise until or unless a new contract is signed.

And no, I"m not a Warwick teacher but I do have a clue. Key-rist.

Friday, May 31
SaltyJake

There is NO mention of the FD in this entire article, yet the comments devolve back to "its all the fire departments fault". Either people can't read or they have a tremendously hard time comprehending what is actually in the article. Somebody finally acted sanely and asked for a LEGAL OPINION on the raping the school pension fund to close the purported budget gap. And, low and behold, it is illegal AND has been done in RI previously with a ruling against the state, restitution along with penalties had to be paid. That cost more money. Warwick cannot afford to go down that road knowing full well that act has been ruled ILLEGAL. Lets see what Little Joey the mayor and his band of no knowledge followers do now.....

Friday, May 31
wwkvoter

I believe future contracts could include a provision for pay raises during any "expired-sunset period". But as of now and maybe forever, looks like there would be zero pay raises once a contract expires and gets frozen. I really dont have an issue with this new law as i think it wont change a thing. The last thing we need is to drive good experienced people out of city jobs, something thats not mentioned enough. We have a lot of good people banging away day and night to keep our city running.

Friday, May 31
Scal1024

I didn't explain my point very well. What I meant to say was let's say I make $20 an hour in '18. If I'm given a 3% raise in '19, '20 and '21 then in '22 when the contract expires I do not revert back to my $20 an hour '18 wages. I was wrong to state that a raise would also occur in '22 and my comment incorrectly read that way, that was my error. If I didn't recieve a raise over those 3 years ('19-'21) than I would stay at my $20 an hour wages when the contract expires in '22. That seems perfectly reasonable I have no issue there. Using the word "raise" was an incorrect way of explaining what occurs when the deal expires.

Friday, May 31
Jimmy

Wwkvoter,

I agree and that maybe the next union play however it’s also going to raise a red flag with the city. If a union proposed weird language like 3% annual raise with no date the city should just laugh and shut it down. Cities aren’t dumb. As you can see these evergreen and OT bills really don’t change anything.

Friday, May 31
Patrick Ramsey

The community has had it with the Thornton administration. We made it abundantly clear when the voters changed three members (majority) on the School Commitee last November.

However, what most people don't know is the Thornton Administration made a deal with the last School Commitee to renew their contracts for 3 YEARS with increases in pay! Right before the new School Commitee could take office. Corrupt and unethical if you ask me.

Votes May 2018:

Bethany Furtado - YES

Terri Medeiros - YES

Eugene Nadeau - YES

David Testa (still active) - YES

Karen Bachus (still active) - NO

Since then, the school department has bankrupted the city two budget seasons in a row with "excessive salaries" (Beacon's headline) and severe mismanagement.

For what the Thornton Administration has done, they should be fired. It would actually match Thornton's last two districts, he was fired from NK and Cumberland too.

Saturday, June 1
Dave Testa

Patrick, to say that this budget issue (or last year's budget issue for that matter) is Thornton's "fault" is silly. No one "made a deal" with anyone with respect to any contract extensions - that allegation is bunk. Also, your implication that they got extensions "with raises" is a bit disingenuous in light of no raise being given this year for any administrator. And the contracts were extended for two years, not three. I explained my reasoning for voting the way I did (http://warwickonline.com/stories/schools-need-to-see-plans-through,135008?). In my opinion, your use of the word "corruption" is nonsensical. Also, you said "since then, the school department has bankrupted the city two budget seasons in a row with "excessive salaries" (Beacon's headline) and severe mismanagement." Seriously? The school budget has had no bearing on the city's fiscal health at all - the vast majority of your tax increase dollars over the years have not gone to the schools. They've gone to the City side of the book and it seems that they're doing a pretty good job of heading towards bankruptcy on their own. And that Beacon headline was also talking about teacher salaries too and our teachers are, and have been, among the highest paid in the state for several years. Finally, please double check your facts as Thornton was not fired from either NK or Cumberland.

Sunday, June 2
can't believe it

Let's not forget that it was Bachus who fought time after time school consolidation. That would have saved the taxpayers millions.

Karen , I really don't care what happened to your father at Almacs but rather I am concerned how retired citizens will stay in their homes due to your incompetence.

I totally disagree with Sinapi....I have absolutely no faith in this school committee.

Sunday, June 2
wwkvoter

Dr Thornton was never fired and in fact did great work as he moved to increasingly challenging work.

Patrick Ramsey also did not mention a single policy of the Thornton administration that he disagrees with. Just making up or repeating easily disproved lies.

I guess "Patrick Ramsey" might be the perfect example of why we need to reform education and reintroduce intellectual honesty and ethics to the public discourse.

A lot of contributors here do their homework and educate me and others about new (ACTUALLY TRUE) information, then you have the occasional "patrick ramsey" throwing around whatever you wish to call it.

Sunday, June 2
wwkvoter

I should add a question, should we call "patrick ramsey" the "taxpayers liar"? In my opinion, that fits...

Sunday, June 2
ThatGuyInRI

Patrick Ramsay doesn't know what he's writing about.

Fact: Thornton was not fired in NK, he applied for the Cumberland postion and was hired.

Fact: Thornton was not fired in Cumberland, he aplied for the position in Warwick and was hired.

How else do you explain that he was working in NK one day, and Cumberland the next?

How else do you explain that he was working in Cumberland one day, and in Warwick the next?

This is all in the public record because he's a public employee.

You don't get fired from a school admin job and have another one within 18 hours; it just doesn't work that way.

School committees have long hiring processes, they take WEEKS. The only explanation is that he alread had the Cumberland job when he left NK, and alreay had the Warwick job when he left Cumberland.

As much as you likely fantasize about him being fired, he wasn't. Are you a WTU honk or something Pat?

What evidence do you have that the outgoing School Committee conspired with the admin? Please provide.

The fact that two things happen in the same general timeframe does not mean that one caused the other. Correlation is not causation.

If only people had any facts when they posted their uninformed opinions, but then again, there would be so few comments.

Monday, June 3
DannyHall82

That sounds like #fakenews lol

Monday, June 3
Patrick Ramsey

Fired was getting ahead of myself. It's no secret the North Kingstown School Commitee and Phil had issues, it was contentious at the end. Trouble was brewing in Cumberland too. Phil was lucky enough to get out at the right time, twice. Regardless, I don't think he has done a good job in Warwick and Testa's trumped up defense of his questionable vote will not convince me otherwise.

At the time of the contract extension vote, Phil had a year left on his contract. It should have been left up to the new School Commitee to decide. There was already 1 vote of no confidence in his tenure. I think they were afraid the election was trending in the wrong direction. They were right. The confusing thing is, Testa would have been part of that new School Committee and would not have been disenfranchised.

Bottom line, poorly negotiated contracts, shady accounting, and excessive administration have not helped the city's bottom line. The school department is the largest line item and is not without blame. New expensive positions that were created out of nowhere, Winman has 4 administrators for 800 students.

When I was in junior high, there was over 700 students and 2 admin... my high school had over 1,200 students with 3 admin. Now, all the secondary schools have 4 administrators with moderate gains in student population. I graduated in 2007, I don't think it was that long ago

Everyone wants to blame the teachers and their raises for the big ask from the school department. All I'm saying is, Phil and his team of expensive lawyers signed that contract and also added some administrative bloat along the way.

Monday, June 3
wwkvoter

Again "patrick ramsey" here is LYING. Or he is DELUSIONAL take your pick. Thornton has NO major issues with either school committee and you can take that to the bank.

Whether he is best for Warwick is up to the committee but he is a solid, dedicated educator who cares about his craft. I like Dr Thornton and his deep lifelong career commitment to public education.

Monday, June 3
Dave Testa

Patrick, again, your facts are not accurate, In NK, Thornton and the Town Council were at odds, particularly with a Council member who always attacked the schools. The Supt in NK today was hired by Thornton as his assistant supt. His relationship with the NK School Committee was fine. Similarly, you're incorrect about his tenure in Cumberland. There he fought McKee over the Blackstone Valley Mayoral Academy which today siphons $4 million out of the Cumberland school budget. Also, the current Supt there and the current Asst Super were both hired by him and the programs and changes implemented by Thornton and his team 5 or 6 years ago are still in place and were carried on by the current Admin and they ranked 5th in the State in the forest round of RICAS testing. Your "shady accounting" is simply hyperbole. "Excessive Adminstration" was discounted by the Program Audit and that 'no confidence' vote was, if I remember correctly, from the WTU who also had issues with previous Superintendents. When I was in HS (Cranston West) I think we had 1 or 2 Assistant principals. That was 40 years ago - look around at all other districts and schools and you will find in almost all cases, the same # of Asst Principals in middle and high schools and many of those schools have smaller populations than ours. So they're wrong too? Finally, the contract. I'd take issue with you saying it was a "badly" negotiated deal. While I do think 3-3-3 is very generous (and was already on the table by the time I got elected) I think the language changes contained therein were good i.e. beneficial to students. As you know, over 80% of the budget is salaries & benefits and of that, the largest single salary & benefit 'group' in the schools is the WTU, then logic tells you that there is where most of the money in the budget will go.

Tuesday, June 4
PaulHuff

Mr. Testa, My question is if you cannot afford to pay for 3/3/3 raises why would you agree to them?

I do believe you were able to get language that you could layoff more than 40 teachers per year. Instead of cutting sports and other initiatives that hurt the children isn't it time to start getting teacher numbers in line with the actual student population?

Tuesday, June 4
Dave Testa

Mr. Huff, for me, I weighed the value of the language changes and their impact over the long term on teaching and learning and that outweighed for me the 3/3/3. In the end, the arbitrator awarded a retro piece too, which just increased the cost so a rejection could possibly have actually ended up costing more. (I admit that there is a healthy does of hindsight there). As far as getting teacher numbers in line with students, there's no 'pure' ratio for that as there are variables that may necessitate more or less teachers, notably the % of IEP students a district has. But, using rough numbers off the top of my head, I think that over the last 10-12 years we've had an approximate 20% reduction in students and approximately a 12-15% reduction in teachers.

Tuesday, June 4
PaulHuff

I appreciate your candor sir. Thank you for the reply.

Wednesday, June 5
Dave Testa

Mr. Huff, I just realized that I may not have fully answered our question regarding layoffs. This year, we laid off 11 teachers based on our initial budget needs. We (the SC) did ask Admin to model additional layoff scenarios. Further layoffs beyond what we ended up doing were, in my view, bad for students because it would have resulted in too many core classes @ the secondary level with 30+ students (not good for teaching & learning), elimination of specialists at the elementary level (not good for students) the possibility of eliminating some AP classes (not good for students) and so forth. So my point is that while some may think that the committee avoids looking at things like this, we did look at it.

Thursday, June 6
Patient Man

Mr. Testa, why do teachers receive raises that are retroactive after working to rule for years?

Monday, June 10
Dave Testa

Patient Man, the retroactive piece was awarded by the Arbitrator. it was not part of the SC offer.

Monday, June 10