Is Providence on the Verge of Bankruptcy?
Tuesday, May 10, 2011
As the seriousness of Providence’s fiscal crisis becomes more apparent, what was once unthinkable is now being discussed as a real possibility—bankruptcy for Rhode Island’s largest city.
“I think we are hanging by a thread,” Councilman Miguel Luna told GoLocalProv. “If we don’t get what we want the city is going to go into receivership, or something like that.”
“There is a very strong, strong possibility that the City of Providence could end up in receivership,” said Councilman Michael Correia. “That’s why we are doing everything we can to prevent this from happening.”
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTTwo months ago, the city was staring at a $110 million structural deficit for next year. The budget Mayor Angel Taveras proposed last week would eliminate that, but that depends on forces beyond his control. His plan includes: $12 million total in concessions from the fire and police unions, $38 million in savings and revenues through new state laws, and $15 million in a tax hike—a portion of which will need the approval of a four fifths of the city council.
In all, Taveras is counting on outside help to eliminate more than $60 million of the deficit.
Taveras: ‘Dark, uncharted territory’
Even Taveras has hinted that bankruptcy is the alternative to his plan. “Providence stands on the edge of a financial precipice. If we are unable to achieve the cost savings and revenue goals in this budget, the free fall of our City over the edge will lead us into dark, uncharted territory,” he warned in his budget address last week.
“The fact that it is being talked about certainly says there is a possibility. That’s the point,” said University of Rhode Island economist Leonard Lardaro. “If we had said this five or ten years ago it would have been preposterous.”
A new state law passed after Central Falls declared bankruptcy outlines the conditions under which the state could intervene and appoint a receiver. (See below for more details on the process, including the distinction between receivership and bankruptcy.)
By law, a city or town must meet two out of five criteria. About a month ago, Providence had potentially met two of the criteria—its bond rating had been downgraded by all three rating agencies and it had major deficits in the current and upcoming fiscal years. In fact, the estimated deficit for next year was more than 15 percent of the budget—comparable, in terms of percentage, with the shortfall in Central Falls before it went under.
Over the last month, Providence has turned the corner on at least one of those factors, whittling down the current deficit from about $70 million to a few million.
Officials: Bankruptcy possible—but not in near future
One City Hall source describes bankruptcy as the doomsday scenario everyone wants to avoid. “I think that’s the doomsday scenario that’s the absolute last resort, so much so that it doesn’t come up,” the source said. “No one wants to consider that option so much so that it doesn’t come up in conversation.”
Other city and state officials yesterday downplayed the possibility of bankruptcy. State Auditor General Dennis Hoyle—who served on Providence Municipal Finances Review Panel earlier this year—called talk of bankruptcy “premature” while the proposed budget is being considered.
“If the Mayor’s budget didn’t pass, it would probably be several steps before we got to that point,” added Councilman Luis Aponte.
Paul Doughty, president of the city firefighters union, agreed. “I think there’s a lot of highway to ride down before anyone can get down to that question,” Doughty said.
Mayor Taveras’ office would not specifically comment on talk of bankruptcy. “We need to produce a balanced budget and restructure Providence’s finances so that the city isn’t continually on the brink,” said spokesman David Ortiz. “The stakes are high. Providence needs help right now from everyone invested in the city’s future.”
Drastic measures could precede bankruptcy
Already, one of the assumptions of behind the Mayor’s budget appears to be at risk. Last week, GoLocalProv reported that the City Council was one vote away from blocking a proposed one percent increase in the tax cap. The situation is fluid: Correia, who was one of the solid no votes, now, just one week later, says he is reconsidering his position. “I don’t want to do that, but these are things I have to look at so Providence doesn’t end up in receivership,” Correia said.
Joe Rodio, the chief legal counsel for the police union, doesn’t think the city will be able to achieve all of the savings and increased revenues Taveras wants. “The administration is trying to pay $110 million which is absolutely illogical,” Rodio said. “You can’t cure a systemic deficit that has accumulated over eight years—through manipulation of the budget—in one year.”
“It doesn’t make sense, especially when [the deficit] is 20 to 25 percent of the budget,” Rodio added. “You just can’t do it.”
Instead, Rodio, who also has served as legal counsel to several communities, says the city should consider a deficit reduction bond, which will give the city about five years to close the gap. Two such bonds were approved by the state for North Providence and Woonsocket last year, according to Hoyle. He said there haven’t been any “substantive discussions” about doing the same in Providence.
If no action is taken, Rodio said bankruptcy is possible—but in four to five years. For now, he says bankruptcy “isn’t even on the horizon.”
If the proposed budget does not pass, Aponte envisioned the city turning to more drastic measures, such as “wholesale layoffs” and deeper cuts in the budget.
GoLocalProv has learned that the City Council has given Taveras a mid-June due date for nailing down all of the unknown factors in his budget. If all the outside forces the Mayor needs have not materialized by then, the council is expected to take matters into its own hands and come up with its own alternative to reducing the deficit.
Major impact on state economy
If bankruptcy does happen, two leading economists say it would have a major impact on the state economy. “Overall, the negative effect will not be negligible and harm the already fragile Rhode Island economy,” said Bryant University economist Edinaldo Tebaldi.
Lardaro said bankruptcy would slow the city’s economy. Because Providence takes up such a large chunk of the state economy, he said that would result in a statewide slowdown. “The two are necessarily linked,” Lardaro said. “To the extent that you can think of a state of Rhode Island without Providence, it would be meaningless.”
Bankruptcy, he said, would increase the chances that Rhode Island would fall into a double-dip recession in 2012—something he has already aired as a possibility.
“It would add to the uncertainties regarding the financial future of the state as a whole, causing business sentiment and consumer confidence on [Rhode Island’s] economy to get worse,” Tebaldi added. “This would affect future investments and discourage new businesses to start operations in Rhode Island.”
Tebaldi said residents might consider Rhode Island an “unstable place to live” and move out while prospective residents might “cross Rhode Island from their options as a place to live.”
Going bankrupt—not an easy process
Assuming that Providence runs out of alternatives, ending up in receivership—and eventually outright bankruptcy—would be no easy task. State law outlines a series of steps that must occur before the nuclear option of bankruptcy is possible. Here is a rough sketch of what could happen—click here to read through state law for all the details.
Step 1—City Petitions the State: If the state decides not to intervene on its own, the Mayor and the City Council would have to jointly petition the state for its help.
Step 2—Fiscal Overseer: Then, the Director of the Department of Revenue has to assess the financial health of the city, taking into consideration whether two of out five possible situations exist, such as a downgrading of bond ratings or multi-year deficits. Those situations have to be “of such magnitude that they threaten the fiscal well-being of the city or town” and diminish its ability to provide for public safety or the welfare of its citizens.
Next, the Director of Revenue would appoint a “fiscal overseer” who would advise the city on its budget, review contracts, and assist in the management of its finances. The overseer would also have to draft a three-year plan for fixing the budget.
Step 3—Budget Commission: If the fiscal overseer concludes that the city can’t pass a balanced budget or a tax levy and faces a “fiscal crisis that poses an imminent danger to the safety” of citizens or their property, he could recommend that the state appoint a budget commission. Under this scenario, both the Mayor and the President of the City Council would be members. Three members of the commission would be state-appointed. The commission would have the power to levy taxes, pass budgets, and approve union contracts.
Step 4—Receiver: If the budget commission decides that its powers are not sufficient to put the city’s finances in order, the Director of Revenue then could appoint a receiver. The receiver would have all the powers of the fiscal overseer and budget commission. Plus, he could exercise the function of any municipal official, employee, board, or commission—from schools to zoning.
Final Step—Bankruptcy: The receiver would also have the power to file for Chapter 9 bankruptcy under federal law.
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