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Municipal Bankruptcy: Who’s Next In RI?

Monday, August 08, 2011


As he addressed the crowd huddled inside the Central Falls City Council Chambers in City Hall last Monday, state-appointed receiver Judge Robert Flanders Jr. made it clear that fiscal problems are not exclusive to the one-square-mile city. He noted that municipalities across the country are attempting to address pension problems, which in part were the cause for Central Falls’ bankruptcy.

“To be sure, as the Governor alluded to, Central Falls is not alone with respect to its pension-funding problems,” Flanders said. “Mayors of Rhode Island’s three largest cities, Warwick, Cranston and Providence, recently publicly stated that in order to return their pension funds to solvency, pension benefits of retirees must be part of the solution. Indeed, throughout the country, municipal budget dollars are increasingly dedicated to payment of retirement benefits at the expense of retaining current employees and providing current public service levels.”

So how close are other cities and towns in the Ocean State to meeting a fate similar to Central Falls?

More Fiscal Emergencies Will Happen

“Central Falls is an extreme case,” says fiscal advisor Gary Sasse, who is currently assisting the Providence City Council as it implements financial reforms. “It’s unique in the sense that it’s a one-square-mile city that has been struggling for a long time.”

Still, the city’s bankruptcy should sound the alarm for other municipalities, particularly around pensions, according to Sasse.

“If we don’t address the pension crisis, more fiscal emergencies will happen in other towns,” Sasse said. “If there isn’t serious pension reform, it will happen.”

Factors That Contributed To Bankruptcy

Flanders said there were a number of factors that led to the decision to file for bankruptcy in Central Falls. The factors included: the inability to obtain voluntary concessions from the unions; the ability in bankruptcy to achieve immediate savings by rejecting collective bargaining agreements with police, fire and municipal employee unions; a lack of potential alternatives; and unwillingness to let the city default; and the ability to use the bankruptcy plan confirmation process as a way to restructure the City's financial obligations to achieve a balanced budget going forward.

Put simply, he said, bankruptcy was the city’s only option.

“Although we did everything reasonably feasible to avoid the necessity of filing for bankruptcy, in the end we were left with no other practical option,” he said.

West Warwick Council President: We’re Next

While their situations may not be quite as dire as Central Falls’, other cities and towns are starting to run out of options as well. In West Warwick, escalating pension costs and a school department that spends beyond it means has Council President Angelo Padula (pictured right) predicting his town could be next.

“If it keeps going the way it is, we’ll be right there with Central Falls in five years,” Padula said. “We’ve been taking and taking and we can’t keep taking or else, forget it, you’ll have a ghost town.”
Padula said the state cut between $6 and $8 million to the city and that while it has gotten a lot of concessions from unions, more will have to come. He said he doesn’t support raising taxes because, “you can’t tax your way out of this mess.”

Padula’s comments came just two days after Moody’s downgraded the town’s credit rating three notches from A1 to Baa1. He said pension obligations and misspending in the school department had a “big effect” on the bond rating being dropped.

“The red light is up,” he said. “It’s not only the pensions. The school department is killing us and the taxes keep going up. I’ve never voted for a tax raise.”

Woonsocket Struggling

West Warwick isn’t the only town facing a diminished credit rating. Last May, Fitch downgraded Woonsocket’s bond rating four notches from A to BBB-.In February, the agency reaffirmed the rating, but changed the rating outlook from negative to stable. The city was also forced to borrow more than $11 million to cover shortfalls in last year’s budget, which led Mayor Leo Fontaine to not rule out bankruptcy as an option for his city.

Still, the city may have received a little bit of help from one of its State Representatives during the General Assembly session. State Rep. Jon Brien (pictured right) managed to get a measure passed in the budget that gives cities and towns the opportunity to realize significant savings on municipal retiree health insurance benefits. In Providence, the savings could be over $10 million in fiscal year 2012 alone.

Brien’s provision could be a lifeline for his struggling district.

“Many cities and towns are under severe fiscal pressure, and have turned to state-level policy makers for help. This budget initiative offers municipalities the option to require retirees to enroll in Medicare as soon as they are eligible – a measure that will offer relief to our cities and towns, and to the taxpayers who fund them,” Brien said. “Without freedom from antiquated state mandates, and as expenses continue to rise, municipal officials have no choice but to raise property taxes to unsustainable rates. What we’ve done here is a benefit to both retired municipal employees – who will be enrolled in an excellent, cost-effective federal health care program – and to our constituents, the local property tax payer.”

Providence And Pawtucket Improving

The two other cities that appeared on the verge of fiscal disaster this winter have actually improved their statuses, according to Sasse.

“The silver lining to all of this is that leadership in Providence and Pawtucket having taken steps in the right direction,” Sasse said.

In Providence, Mayor Angel Taveras and the City Council managed to navigate their ways out of a $110 million structural deficit by achieving savings in contracts with the fire, police and teachers unions, as well as Local 1033. The city also got more than $18 million in savings from the state budget.

While the city still has more work to do, Communications Director Melissa Withers said the once-predicted cash flow problems this summer are no longer an immediate concern.

Pawtucket’s new administration has had similar success. Mayor Don Grebien said he managed to cut the $12 million deficit in last year’s budget down to under $1 million and for the new fiscal year, he has a balanced budget.

Grebien acknowledged that he will still be forced to make difficult decisions and pensions still need to be addressed, but he said the city is on better financial footing than it was when he took office in January.

State Senator Elisabeth Crowley credited Grebien with helping to avoid a Central Falls-type situation.

“I think Pawtucket is going to learn from the process,” she said. “I think Mayor Grebien has taken steps to try and avoid this kind of thing. But I think they're going to take a plan to actually deal with their pensions."

 Must Have Pension Reform

Still, no city is in the clear yet, according to Sasse, who said everything will come down to pension reform.

On the state level, the reform discussion is expected to pick up during a special General Assembly session this fall. The State Legislature has committed to addressing the issue at the request of General Treasurer Gina Raimondo.

But Sasse said cities and towns don’t have to wait for the state to address municipal pensions.

They have no other choice.

“Unless there is serious pension reforms and cities and towns find ways to reduce costs, Central Falls will not be the last fiscal emergency,” Sasse said.


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