PROVIDENCE, R.I. - Rhode Island would roll back some provisions of its landmark 2011 pension overhaul — but maintain billions of dollars of pension savings — under a settlement proposed to end legal wrangling over the sweeping pension law.

The settlement announced Friday would restore some pension increases to retirees that had been suspended in the law. It would also allow more workers to keep their traditional pension — without a new 401(k)-type account.

The settlement, which must be approved by unions, retirees and state lawmakers, would cost the state $13 million and its cities and towns $11 million in additional pension costs beginning in 2015. Overall, the changes would raise the state's unfunded pension liability from $4.8 billion to $5 billion.

The settlement would resolve the legal challenge from public workers and retirees upset with the 2011 changes — avoiding a long and costly legal battle that both sides wanted to prevent, according to lawyers for the state and the unions.

"We did not cave, nor did they cave," said Richard Licht, the state's director of administration, who was closely involved in the yearlong, closed-door settlement talks. "This is not about caving. It's about reaching an agreement."

Rhode Island had one of the most troubled pension systems in the nation before lawmakers passed the sweeping changes during a special legislative session in 2011. The so-called Rhode Island Retirement Security Act was designed to save an estimated $4 billion over the next 20 years. Before the changes were enacted, Rhode Island's pension costs were set to jump from $765 million in 2015 to $1.3 billion in 2028.

The law was cited as an example during debates in states like California and Illinois that face their own pension problems. State Treasurer Gina Raimondo's efforts to pass the law were hailed by The Wall Street Journal and Time magazine. Collectively, states face a $1.38 trillion pension shortfall, based on a 2012 study by the Pew Charitable Trusts, and Rhode Island was widely seen as a test case for efforts to rein in pensions elsewhere.

The settlement now moves into what is likely to be a complicated and time-consuming approval process. Union members and retirees will likely be asked to endorse the settlement by mail ballot. Lawmakers will be asked to approve the settlement this year.

If they reject or modify the settlement proposal, the lawsuit would likely proceed to trial.

"The settlement is just the first step of the process," said Lynette Labinger, lead attorney for the plaintiffs. "The General Assembly can take any action that it deems appropriate."

The 2011 changes were designed to shore up the state's foundering pension system by suspending pension increases for retirees, raising retirement ages for many government workers and creating a new retirement system that combined a 401(k)-type account with a traditional pension. Supporters said the changes were necessary, but many workers and retirees argued they were unfair and unconstitutional.

The changes in the settlement would retain much of the 2011 law. The biggest changes would affect retired state and public workers.

The settlement would give cost-of-living increases to retired government workers sooner than the current law would allow. It calls for a one-time 2 per cent cost-of-living pension increase once the settlement is enacted by lawmakers. Additional increases would come in 2017, and every four years thereafter until the pension fund is 80 per cent funded.

The existing law calls for limited increases every five years until the 80 per cent funding level is reached. The fund is now about 60 per cent funded.

The settlement would also call on public workers to contribute slightly more toward their own retirement benefits.

Top lawmakers were briefed on the settlement Monday. They did not respond to messages seeking comment Friday but have said they would give the settlement careful consideration.

The settlement is certain to play a leading role multiple political dramas unfolding in Rhode Island. A legal defeat for the law would have dealt a blow to Raimondo, who has made the pension overhaul a cornerstone of her campaign for governor. Lawmakers face their own elections in the fall. The law is also a test of the political clout of organized labour, which has long enjoyed great influence in the overwhelmingly Democratic state.

Firefighters, teachers and other public workers angrily protested the proposal as it worked its way through the General Assembly, and vowed to sue even before the law was passed. They argued the changes were an unfair and unconstitutional violation of their contract rights, and accused Raimondo and lawmakers of refusing to negotiate.

Mediation in the case began more than a year ago, with details of the negotiations kept secret by a gag order imposed on the talks.

News from © The Associated Press, 2014