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Expert Says Municipalities Should Stop Threatening Bankruptcy

Thursday, March 29, 2012

 

Municipal leaders should stop using the “B” word when it comes to predicting the future for their cash-strapped communities, according to Dr. Edward Mazze, Distinguished University Professor of Business Administration at the University of Rhode Island.

Mazze said the threats of bankruptcy for cities and towns are creating havoc for businesses and fear for residents who are concerned their property taxes may continue to rise. He said the threats also damage Rhode Island’s brand from a national perspective, making it less likely for businesses to have any interest in relocating to the Ocean State.

Central Falls filed for bankruptcy last August and recently, leaders in Providence and Woonsocket have warned that their cities are at risk of running out of cash.

Threats Hurt Entire State

Providence Mayor Angel Taveras, who faces a $22 million deficit for the current fiscal year, has warned that bankruptcy could be an option if the city does not receive concessions from its retirees and just over $7 million in payments in lieu of taxes from the city’s nonprofit institutions. Woonsocket’s massive debt in the school department is expected to lead to a supplemental tax hike to help keep the cash-strapped city afloat.

But while the financial concerns are real, Mazze said cities and towns are using the threat of bankruptcy to take the place of their fiduciary responsibility and duty of care by allowing municipal entities to overspend and to permit pension and health benefit programs to be underfunded.

“Locally, the threats of bankruptcy or the appointment of a receiver has had negative impacts on business and consumer confidence, product and service providers to municipal governments, the management and labor relations climate and taxpayers who fear that their property and other taxes will increase,” Mazze said. “And nationally, these threats have created problems in the financial markets and have reinforced the notion that Rhode Island is not a good place to locate a business.”

Solution: Make Tough Decisions

For Mazze, the state’s inability to create new jobs over the last four years (the unemployment rate was 11 percent last month) will only get worse if the threats of bankruptcy continue. He said the way to solve the problem is to bring in new officials who can manage a budget.

“Fiscal irresponsibility should lead to the termination of those officials who willfully over-spent their budgets,” Mazze said. “We can change this system by going to a zero-based budgeting system where the budget starts at zero each year and all expenditures and personnel changes have to be supported by hard data.”

Mazze said Taveras and Woonsocket Mayor Leo Fontaine need to hold department heads accountable and continue to make difficult decisions. The bottom line, he said, is that while bankruptcy may be an easy way out for some cities and towns, it will only perpetuate the state’s poor economic conditions.

“It is easy for consultants to recommend a receivership or bankruptcy action because they have no risk in the outcome and everything to gain in consulting fees,” Mazze said. “However, constantly threatening bankruptcy makes the state's economic climate difficult for those businesses and taxpayers living in Providence and Woonsocket and any other city thinking of using this approach.”


 

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