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Does Providence Deserve a Bailout?

Friday, February 08, 2013

 

The City of Providence is facing an estimated $11.2 million dollar budget shortfall for the 2013 fiscal year. Should the state help plug the gap?

In an attempt to close a projected budget shortfall for the 2013 fiscal year, the city of Providence will reportedly ask the state for an additional $4-$5 million in municipal aid.

The news comes following a report released last week by Internal Auditor Matt Clarkin that, due to a depleted reserve fund and a number of major underfunded obligations including annual required pension contributions (ARC), Providence is about $11.2 million short of what it needs to attain a balanced budget after the second quarter of the year.

So far, there hasn’t been a formal request of the General Assembly but, according to House Communications Director Larry Berman, there was a meeting of the Providence legislative delegation in which Mayor Angel Taveras mentioned the need for the addition funds “in broad terms.”

But at a time when city and municipalities across Rhode Island are struggling to keep up with rising costs and have a state-imposed cap on how much they can increase taxes every year, the question is: Does Providence deserve a state-assisted bailout when other municipalities, most notably Central Falls and Woonsocket, have been told in recent years that they have to make due with what they’re allotted?

The answer may be more complex than just dollars and cents.

A Slow Climb out of the Red

To understand where Providence stands midway through the 2013 fiscal year, it’s important to see the progress the city has made in the past two years.

When Taveras came into office in 2011, he inherited a large $110 million structural deficit that threatened to force the city into bankruptcy.

By early 2012, the city was facing a $22 million hole and the first-term Democrat said that without freezing cost-of-living-adjustments and capping pensions for retirees, not to mention collecting $7.1 million in voluntary payments from tax-exempt institutions, Providence would undergo a series of cuts that would make the city “barely recognizable” to its residents.

Taveras got most of what he was looking for over the past 12 months but still ended the 2012 fiscal year with a $15.2 million deficit according to the annual city audit, continuing a trend of four consecutive budgets in the red amounting to a total of $39.4 million in deficits from 2009-2012.

Even with the negative final figures, the tone from the Taveras administration so far this year has been a positive one as he insisted last week that Providence will close this year with a balanced budget.

“As I stood before you on February 13, 2012, Providence was running out of cash, and running out of time,” Taveras said in his State of the City address last week. “In the months that followed, there were some who said Providence could not avoid filing for bankruptcy. Today it is my privilege to deliver a much more hopeful report on the State of our City: Providence is recovering.”

But that recovery is not yet complete.

Still Work Left to Do

Even with undeniable progress toward a balanced budget and a landmark pension agreement that Taveras estimated will reduce the city’s unfunded liability by an estimated $200 million, Providence still has a large budget shortfall on its hands midway through the fiscal year.

Just how big the numbers are, however, depends on who you ask.

According to Clarkin, the city is $11.2 million short of what it needs to reach Taveras’ goal of a balanced budget but his interpretation is vastly different than the city’s approach to the topic because it includes a $4.5 million dollar payment to the so-called “rainy-day” reserve fund that has recently gone dry.

The city’s Director of Administration, Michael D’Amico, reported this week, however, that he believes Providence has a $5 million dollar problem overall, a large portion of which no doubt comes because of lower expected tax revenues, a $4.1 million hole in the ARC and a firefighter overtime pay line item that is $2.2 million over budget.

Some believe, however, that the real reason for the remaining deficit has less to do with the city’s practices and more to do with recent decisions made at the state level that have left Providence unable to get on solid financial ground.

The Real Problem?

While there will never be a clear consensus for what’s driving Providence’s budget woes, city officials, members of the Taveras administration and those on the Providence City Council have a wide range of theories as to what they believe is the root cause.

“Through the collaborative efforts of the council and the administration, our local government has laid the groundwork for financial prosperity in years to come,” Providence City Council member David A. Salvatore said. “While I am pleased with the progress and the systemic changes that have been made to reduce the structural deficit, Providence has not fully-recovered from previous cuts in state aid. An infusion of money from the state will play a critical role in balancing this year's budget while maintaining city services at current levels.”

Council member Bryan Principe, meanwhile, the problem could be solved if the state reversed its stance on one controversial decision made a couple of years ago.

“The $4-$5 million request is only about a quarter of the more than $20 million cut in state aid Providence taxpayers absorbed when the state cut the auto excise reimbursement to every city and town in 2010,” he said.

Others believe the problem is a perceived lack of a fair distribution of state aid for the capital city.

“One case in point is the school formula,” said Gary Sasse, director of the Bryant (University) Institute for Public Leadership and former director of both the Rhode Island Public Expenditure Council and Department of Administration. “The school formula has underfunded urban communities for decades.”

According the Sasse, the full phase-in of the state’s funding formula for education is simply taking too long and urban communities like Providence are suffering because they have “not received an equitable distribution of state aid.”

“I think that’s a policy issue that needs to be discussed,” he said. “I think Providence, given its influence as the capital city, is right in raising that issue but I don’t view this necessarily as a bailout. I view it as a correction in the state aid policies. The more fundamental question is ‘Is state aid being equitably distributed?’ We know the answer to the question because with the schools, it hasn’t been equitably distributed. We’re playing catch-up right now. The question is, are we playing catch-up at a fast-enough basis?”

Apples and Oranges

While Central Falls and Woonsocket made national news for their financial battles over the past two years, and East Providence was right there with them in asking for state help to stay afloat, Sasse feels Providence shouldn’t be compared to other cities and their struggles because it is no longer facing bankruptcy and the additional state funds would merely be used to assist the city in its efforts to close its budget gap rather than to save it from financial insolvency.

“Providence has a deficit, which they have to address, but it’s a manageable deficit,” he said. “Even if you take Clarkin’s figures, the projected deficit is only about two or two-and-a-half percent of general fund revenue and that’s a management issue. It’s a challenge but it’s a manageable challenge.”

Some outsiders wonder how it will look to other cities and towns in the state, however, if the capital city is granted help that others have struggled to get.

“Providence has access to resources that Central Falls, Woonsocket and East Providence do not have access to and for that reason I do not believe that it is fair or proper for the General Assembly to provide these requested funds,” said Ken Block, the founder of the Moderate Party and president of the RI Taxpayers organization. “Providence should not be a special case.”

Mark Zaccaria, Chairman of the Rhode Island Republican Party, says the state would send the wrong message by approving additional aid for the capital city.

“It would reinforce the fantasy that everything is OK and political leaders can continue to conduct business as usual without fear of repercussions from fiscal mismanagement,” he said. “The more we do that the harder we make it on the hard-working, tax-paying men and women of Rhode Island when the crash does come.”

Edward M. Mazze, a professor of business administration at the University of Rhode Island, says it’s “time for cities and towns to take full responsibility for their budgets.”

“For years, the fail-safe method of municipal budgeting included requesting everything you had the year before, add a percentage, over-spend, threaten bankruptcy and then go to the state for help,” he said “The state needs to say ‘no.’ Thus, the state does not have to choose between cities and towns to support. Any shortfall should be made up by cutting expenditures now not after the funds have been spent.”

Is Providence Special?

Some wonder whether Providence's size and huge impact on the state's economy make it a special case when considering the state's role in helping it stay afloat.

The core question to consider when debating whether or not Providence deserves additional aid, Sasse says, is what the state gets from helping its largest city.

“I think needs to be looked at is what is the relationship between providing aid to cities like Providence to helping the economy in the state,” Sasse said. “Because there are a lot more people in Providence during the day time than the night time. People work from Providence, it’s a major economic center.”

Sasse points to projects like the I-195 bridge as examples of ways in which the things going on in the capital city have a direct effect on the rest of the state.

Salvatore, meanwhile, says the state would benefit in a big way by keeping its largest city in the best economic standing possible.

“Providence has been recognized nationally for making necessary changes to our pension system and receiving more money in lieu of taxes from the city's major tax exempt institutions,” he said. “A balanced budget in Providence sends a clear message to bond rating agencies that the Capital City is open for business and will improve the economic outlook for the entire state.”

Principe says Providence shouldn’t get special treatment but more should be done as a whole for the entire state.

“After a very difficult period, the state is starting to see a turnaround in budget projections,” he said. “More aid should be given to all cities and towns to help relieve the upward pressure on local property taxes. This will have a very positive economic impact on the Rhode Island economy.”

Some, however, are less positive of the message rescuing Providence would send, particularly to taxpayers of other cities and towns.

“The fact that the City of Providence would even dare ask for an additional $4-5 million in state aid to cover their budget shortfall shows the corruptness of the political class of that city,” said Rhode Island Tea Party President Susan Wynne. “You can’t put your hands in the pockets of the communities who are doing a good job and give to those who are not. It’s nothing short of redistribution from the healthier communities and it is absolutely unjust. Its taking from the pockets of the taxpayer. Period. Where do they think state aid comes from?”

Help is Already on the Way

Governor Lincoln Chafee has already asked the General Assembly to increase aid to cities and towns. Does that mean he'll approve the request from Providence for $4-$5 million more?

Perhaps the most interesting aspect of Providence’s request for additional state aid is the fact that, in his State of the State last month, Governor Lincoln Chafee has already pressed on the General Assembly to give more to Rhode Island’s municipalities.

Not just Providence but all of them.

Chafee has pitched an increase of $20 million to help cities and towns with their distressed property tax bills and, of that amount, the capital city is expected to net an addition $2 million.

If approved, that would be roughly half of what the administration is asking for.

All Eyes on 2014

As Providence waits for the state’s answer regarding its request, there is no doubt there are those who wonder what the political ramifications of the capital cities current budget crisis are on the 2014 race for Governor.

Taveras is rumored to be a candidate for Chafee’s seat and how the city’s fiscal situation is handled in the next six months, as the race begins to heat up, will no doubt play a role in whether or not he runs for higher office or tries for another term at City Hall.

Regardless, Sasse says, it may be in everyone’s best interest to see the capital city get what it’s looking for to balance its books.

“I think the political ramifications are beneficial to all parties because good government is good politics,” he said. “And it’s kind of early. The governor has two more years and the campaign won’t start in earnest for another six months so I think the issue should be on its merit and if Taveras runs or Chafee runs or whoever the candidates are, they will all benefit from good government. I think the right decisions are good politics for everybody.” 

 

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