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Will Central Falls Bankruptcy Damage RI’s Brand?

Tuesday, August 02, 2011

 

Bankruptcy in Central Falls will further damage Rhode Island’s already poor reputation as one of the worst states to do business and have far-reaching impacts on municipal finances beyond the confines of the tiny 1.3-square-mile city, economists and other experts warned yesterday.

 

“No question it’s going to make it more and more difficult for Rhode Island to change the image it has,” said Ed Mazze, a business professor at the University of Rhode Island. “What does this do? This puts Rhode Island in a worse position than it was yesterday.”

The Ocean State already has a reputation for having one of the highest unemployment rates in the country and recently came in dead last in a national CNBC survey of business friendly states, noted University of Rhode Island economist Leonard Lardaro.

“We’re becoming the poster state for what not to do—or what not to be,” Lardaro said.

Lardaro and other experts warn that the crisis in Central Falls could have a sweeping and lasting impact across the state—scaring away investors and businesses, potentially making it more difficult for cities and towns to borrow money, and putting more pressure on elected officials and unions to reform public pensions at the local and state levels.

A damper on economic development?

Mazze said the “shakiness” in municipal finances is a deterrent to investors—a concern heightened by Central Falls. “This will be another bad mark on Rhode Island,” Mazze said. “This does have an impact on our ability to attract and retain business.”

 

“I just don’t think we’re exactly presenting a compelling reason for people to come to us,” Lardaro added.

 

But not everyone thinks that bankruptcy is automatically a bad thing when it comes to bringing business into the state. Governor Lincoln Chafee told GoLocalProv that the bankruptcy filing could be a “positive” move for economic development by sending the message that Rhode Island is serious about addressing its financial problems.

Eileen Norcross, a scholar at the Mercatus Center at George Mason University, said businesses might avoid those communities that have unfunded pension liabilities and other fiscal problems similar to Central Falls. “It may make people leery of moving to that municipality or doing business in Rhode Island,” said Norcross, an expert in public policy and economic development.

But, like Chafee, she said the state’s intervention in Central Falls could also be a positive sign to the business.

Gary Sasse, the former Director of the Department of Administration under Gov. Don Carcieri, expects that businesses will take a wait-and-see approach. “It’s not going to fly under the radar,” he said. “If the receiver presents a plan in the next 30 days that corrects the problems, businesses will know.”

Wake-up call on pension reform

 

The other big implication of bankruptcy in Central Falls is in the arena of pension reform. “This Central Falls situation could very well be the tip of the iceberg and we better start working on what’s under the tip of the iceberg,” Mazze said. “This is a wake-up call.”

General Treasurer Gina Raimondo yesterday signaled that she is heeding that wake-up call, issuing a statement that she is more determined than ever to push for pension reform.

The Rhode Island Statewide Coalition said that same urgency is needed at the local level, describing an estimated $7.6 billion total in unfunded liabilities in cities and towns as a “ticking time bomb” that must be addressed now that Central Falls has “gone under.”

“What has happened to Central Falls should vividly demonstrate to all elected leaders that the mountain of unfunded liability in local pension plans can—and will—topple communities if they are not addressed this year,” said Harriet Lloyd, executive director of RISC.

It’s unclear how retired government workers will react. While Central Falls is certainly an attention-grabber, the head of one of the state’s largest public employee unions doubts that they will be more willing to accept cuts to their benefits as a result. “I don’t see a day when somebody’s who’s already retired will feel good about cutting their pension,” said Michael Downey, head of AFSCME Council 94.

“I think they’re going to fight as hard as they can,” Mazze said. “Even though half is better than nothing, half is not enough.”

Cranston Mayor Allan Fung, who sits on the pension advisory panel for Raimondo, said it’s just too early to tell if retirees will heed the wake-up call of Central Falls. “I don’t know,” Fung said. “It’s just difficult to say right now.” He said he nonetheless remains “cautiously optimistic” that the state will pass meaningful pension reform by the end of the year.

Third impact: ability to borrow money

Bankruptcy in Central Falls could also affect the ability of cities and towns to borrow money at favorable rates, Fung warned.

Lardaro said it will make it harder for the state and fiscally troubled communities like Providence to maintain their existing bond ratings. “It’s not going to cause an instantaneous downgrade but it will be another negative that will be in the back of rating agencies’ minds,” he said.

Even though Raimondo said she does not think the state will have difficulty accessing bond markets, Ken Block, a business advocate and head of the Moderate Party, noted that when New York City declared bankruptcy in 1975, New Jersey had a harder time selling its bonds. “It was sort of guilt by geographic proximity,” Block said.

 

More bankruptcies to follow?

Central Falls is the fifth municipality to file for bankruptcy this year—but the first in Rhode Island history, according to Robert Flanders, the state-appointed receiver for the city.

Yesterday, Mayor Charles Moreau predicted that it won’t be the last. “You’re going to see it a lot more often,” Moreau said. “You just go down the list—Pawtucket, Woonsocket, North Providence, East Providence, West Warwick, Providence.”

Block agreed that more bankruptcies could be in the state’s future. “A municipal bankruptcy—I don’t think it’s likely a singular event,” he said.

Lardaro said it’s possible other cities will follow suit. He said that all depends on whether Providence will be able to make payroll this fall—even though city officials have said that under the new budget they are confident they will.

In Pawtucket, Mayor Don Grebien said he had been working hard every day since taking office earlier this year to prevent a repeat of Central Falls in his city. The bankruptcy filing, he said, adds “even greater urgency” to his efforts, but he remained confident that Pawtucket could avoid it. “Those efforts to right our fiscal ship will continue unabated and I am confident we will be able to tackle and solve our problems and retain control of our own financial future,” Grebien said.

Fung is highly skeptical that another city could turn to bankruptcy. While it is true that other communities like Cranston have unfunded pension liabilities that are comparable, in terms of percentages, to Central Falls, he said it was a whole host of other factors that sunk Central Falls—such as cash flow issues and an insufficient tax base.

“We have a pension problem, but we’re far … away from where Central Falls is,” Fung said.

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