Cities and Towns Going Broke: Who is Next?
Saturday, November 19, 2011
The comprehensive pension reform package signed into law by Governor Chafee Friday cuts the state’s unfunded pension liability by about $3 billion immediately, but Chafee, municipal leaders and economists are saying the failure the address local pension plans may send cities and towns down a path similar to that of Central Falls.
It started this week with East Providence. The state appointed a fiscal overseer to help address the 47,000 resident city’s $7 million shortfall. According to a June report, the city’s unfunded pension liability combined with its unfunded liability for post-employment health benefits hovers around $212 million, and it has failed to make full contributions to its pension plans in each of the last five years.
The appointment of Rhode Island State Police Maj. Stephen Bannon as the city’s fiscal overseer is the first step the state can take to address local finances. And while state leaders said this week that East Providence is not yet facing a situation like Central Falls –which filed for bankruptcy this summer- the city’s finances are hardly on solid ground.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTEast Providence is not alone. As Chafee has consistently pointed out in recent weeks, two-thirds of the local pension plans in the state are failing and that doesn’t take into account the other post-employment benefits. Cities and towns such as West Warwick, Coventry and Johnston are considered vulnerable and the larger cities like Pawtucket and Providence are all at risk of going broke, according to Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island.
“East Providence is just the beginning of round two of the cities and towns that will be asking for state fiscal management assistance if the General Assembly does not approve the pension program recommendations later this week and provide the cities and towns with the tools needed to meet their unfunded pension and health benefit liabilities,” Mazze said. “West Warwick may be next followed by the larger cities and towns who have been unable to manage their fiscal affairs because of the economy and lack of state financial support. It is time to put fiscal decisions and the control of the budget back to city and town governments.”
Mazze said bankruptcy may soon become the only option for some cities and towns.
“Without cutting costs to where service levels are difficult to maintain, or dealing with existing and future unfunded liabilities or raising property taxes, Rhode Island's cities and towns will be lining up for state receiverships,” he said. “We will run out of capable receivers and have to consider Chapter 9 as the solution to getting Rhode Island's cities and towns ‘back on track.’”
West Warwick: Get Rid of the Unions
If West Warwick is the next to face state intervention, it will be because of the town’s inability to achieve concessions from unions, Council President Angelo Padula told GoLocalProv last week. Padula has been sounding the alarm on the town’s finances for months, raising questions about overspending on administrative costs in schools and the underfunded pension system.
As of June, the town faced an $84 million unfunded pension liability and Padula said he too believes the pension reform package should have included a way to address local pensions. Padula blames unions for much of the problem.
“In my opinion, we shouldn’t have unions,” he said. “They used to represent the little guy. Now they’re part of the problem.”
East Providence Leaders Tried to Address Problems
Former East Providence Mayor Joseph Larisa is another municipal leader who tried to address rising costs in his city, but failed to achieve concessions. When Larisa first reclaimed the city’s mayoralty in 2008, after having been ousted 2006 (he lost again last year), he noticed that the city was paying its 10 custodians roughly $675,000 per year. Larisa said he tried to negotiate those costs lower, but to no avail.
So he did what businessmen do. He looked at privatization. And he liked what he saw.
“We contracted out to a janitorial company that provided the services for $325,000,” said Larisa.
But the unions took the city to the state arbitration process. The arbiter ruled not only that the city didn’t have the right to subcontract out their janitorial services, but they also forced the city to pay the workers the $650,000 that they would have made had they not been laid off. Larisa is certain the city could have prevailed in Superior Court.
“Cities and towns never win in arbitration, because the arbitrator knows that if he rules against labor that they’ll never choose him again as a neutral arbitrator,” said Larisa.
But by the time the city would have been able to contest the arbitration ruling in Superior Court, Larisa, and his allies on the Council, had already been defeated in the 2010 elections—which almost across the board were a huge win for organized labor. The current council and mayor decided against appealing the decision.
“That’s just one example of the chaos that the current council has brought on,” said Larisa.
Larisa argued that the current liabilities facing East Providence are not similar to what’s facing other communities. The city’s pension plan is roughly 50-percent funded (far from optimal, but not nearly as poor as other communities).
“I think the financial situation is worse in places like Providence and Pawtucket than it is in East Providence,” Larisa said. “But in those communities you have competent and responsible leaders like Angel Taveras and Don Grebien in charge,” said Larisa.
Former School Committee Chairman Anthony Carcieri, who eliminated health care buybacks for teachers, which allowed teachers who opted not to receive health insurance from the city (say, if their husband works for the state and already receives taxpayer-funded insurance) to receive a “buyback payment” of roughly $5,000. The School Committee, under Carcieri’s leadership, also took unilateral action, once the teachers contract expired, to reduce salaries and impose health care co-share payments of 20-percent. For his efforts, he was trounced at the polls in 2010.
“I was sounding the alarm, totally unheeded, about our financial situation and its challenges, for years, and that’s why we are where we are today,” said Carcieri, who is of no relation to the former Governor.
Carcieri said the cost of compensating employees is “totally through the roof” in all cities and towns. Carcieri said that public employees have become experts at voting themselves higher salaries and benefits though electing politicians that will make those desires reality.
“The citizenry is not just apathetic. They’re totally ignorant, and they don’t even want to learn anything,” said Carcieri.
Pawtucket Mayor: We Must Address the Problems
Pawtucket Mayor Don Grebien said this week the pension reform legislation contains much that promises to improve the solvency and assure the stable future of pensions overseen at the state level, but it does not do enough to address local pension plans.
Grebien, whose pension plans are underfunded to the tune of $166 million, was among the local leaders that lobbied the General Assembly to suspend annual cost of living allowances, limit pension benefits to what is available under state plans and work toward moving all municipal employees to state-run plans.
“Until pension plans now threatened with failure at the city and town level are addressed, the task of reforming and stabilizing the pension systems throughout Rhode Island, for the financial security and well-being of retirees, current employees and taxpayers alike, cannot be called complete,” Grebien said.
Governor Chafee: Job is Not Done
The cities and towns have one key leader on their side: Chafee. The Governor praised the pension reform package this week, but has pledged to propose legislation that will address local plans on the first day of the new General Assembly session in January.
“While this is an important step toward comprehensive pension reform, it is incomplete. Our job is not done,” Chafee said Thursday evening. “It is my firm belief that the single best way we can market Rhode Island is through wise fiscal management. Tonight, we have taken a significant initial step toward that goal.”
Chafee said the next step must include relief for cities and towns.
“ Now we must continue the difficult work of taking on challenges that have been decades in the making: shoring up our independent municipal plans, helping our cities and towns and the Rhode Islanders who are struggling to pay skyrocketing property taxes, and fixing our chronic structural deficits,” he said. “Taking these steps will do more to bring jobs and economic development to our state than any tax incentive or loan guarantee deal.”
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