NEW: RIPEC Report Finds Bankruptcy Might Not Solve Cash-Strapped Cities’ Problems
Monday, April 02, 2012
Bankruptcy may not be the answer for the state's struggling municipalities, according to a new report released today by the Rhode Island Public Expenditure Council (RIPEC).
The report finds that, although bankruptcy may be the only option for some municipalities to substantively restructure their financial obligations, it is not a "panacea" for all communities and that increased fiscal flexibility may be a better route for communities in fiscal distress.
According to the report, between fiscal years 2008 and 2012, state aid to cities and town was slashed by 72.6 percent and as residential property values have seen steep declines in the recent recession, local tax bases have eroded. The resulting pressures on local governments to meet service level demands given increasingly constrained resources, coupled with unaffordable expenditure structures that some communities have not modified, have pushed some local governments to the brink of insolvency.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTCurrently Providence faces a $22 million deficit in the current fiscal year and Woonsocket is considering a supplemental tax hike to address a $10 million shortfall in its school department. East Providence and Pawtucket have already had to ask for cash advances in order to make payroll.
Although bankruptcy may have been the only option left for Central Falls, Chapter 9 must, ultimately, be viewed as the option of last resort for municipalities faced with impending insolvency. The tangible and potential costs are too great to view bankruptcy in any other light. In recognition of the fact that a one-size-fits all approach may not be the most efficient or effective resolution to the problems faced by the state’s municipalities, enabling legislation that provides relief from state mandates may be the most effective means of addressing municipal fiscal stress given the current economic climate. Moreover, the parties subject to this restructuring effort – employees, retirees, vendors and debtors – may be best served by local officials empowered to make modifications to these agreements, ideally through a collaborative process, rather than through bankruptcy, in which the primary goal is to make the community fiscally solvent.
If municipalities do not act, to the extent possible, to resolve their fiscal challenges the state itself can, and should, intercede on behalf of a municipality in order to provide a pathway to solvency. Enabling legislation granting fiscal flexibility – which RIPEC has long-advocated – would empower communities to regain control of their fiscal houses and respond to their unique sets of challenges, consistent with the principle of home rule. In turn, communities must take a proactive approach to restructuring their finances before they become insolvent. At the same time, these provisions would serve to further legitimize the process of state oversight and intervention, should a community require such assistance.
