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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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Comments:

Pawtucket is not improving they just raped us with excise taxes and next year it will be property tax, Grebien borrowed somewhere around 12 million that we can't afford to pay back

Comment #1 by happy harry101 on 2011 08 08

What about North Providence? We had to go with a deficit reduction bond for $10.5 million last year, raised the auto excise tax to the highest rate in the state with the minimum deductable of $500, had our property drop in value of 17%, have 10%+ unemployment, have not been able to get the unions to provide concessions (especailly the fire dept), went ahead and authorized a $700,000 ladder truck for the fire dept and of course raised the taxes without cutting expenses.
NP is totally blind to what is going on and the administration is leading us down the bankruptcy path without blinking an eye.

Comment #2 by Gary Arnold on 2011 08 08

The wheels are finally coming off the wagon with all of these municipalities. The urban areas will be first to blow up. Central Falls was always considered the first domino to fall as their economy has left decades ago. Central Falls does not have enough revenue income to support the debt structure they have been struggling with. The continued give-away contracts awarded by that city council was an affront to every taxpayer in that berg. The same tactics employed in Central Falls was and continues to be used by the public union leadership against the other municipalities. They (municipal councils) either hire an attorney to represent them or go it alone against them. This is where they lose big time. With the unions gaining control of the state legislature, they have tilted public law with statutes for binding arbitration for police and fire department personnel. Now the teachers want to get on the gravy train as well as the rest of the municipal workers. They know the ship is sinking but they want to grab all they can before the end comes. This is the new American Greed!
Perhaps Governor Roberts of the 50’s had it right – consolidate to 5 municipalites and save some money!

Comment #3 by Lance Chappell on 2011 08 08

@ Lance, times have changed Governor Roberts had it right. Lt. Gov Roberts would love to have a municipality for every street in the state.

Comment #4 by Lis Velva on 2011 08 08

@Liz, you are so right but this is the tough lesson that has to be learned now. Bond borrowing will become more expensive for these bergs and the markets will punish the government for their wasteful spending. There will be reforms coming - government has no choice. Even Gump can't mess that up. smile

Comment #5 by Lance Chappell on 2011 08 08

Tough times ahead for sure for these other distressed communities. The time is ripe for wholesale fixes. Local politicians will have to weigh huge tax hikes against structural change. With no help available from the state, and certain political doom with big cuts to municipal budgets, big time tax hikes seem like the only viable alternative.

Comment #6 by David Beagle on 2011 08 08

I just became aware that bond holders will be paid, in all bankruptcies, before the retirees. How fair is it that we actually passed a bill, a year ago, that would make the investors the first pay outs before the people that have earned these monies? I'm disgusted. The name brought up in offering this bill: Rosemary Ruth Gallogaly?

Comment #7 by Sandra Ross on 2011 08 08

@Sandra:
I guess we're more worried about much it will cost the cities and towns to borrow money than we are the pensioners. Up until the last election we were still floating bonds for open space...OPEN SPACE!!! Screw the bond agencies. If a city or town is stupid enough to keep borrowing money in these times, they should be charged a high premium.

Comment #8 by Max Diesel on 2011 08 08

The purpose of local taxes is to promote the common good by providing for basic services and some quality of life services, services necessary for a civic life that works for all citizens, high income to low income.

When an excessive percentage of taxes goes to pensions, the purpose of raising taxes is perverted.

This problem must be solved but politicians have learned to be expert verbal dancers, not problem solvers.

Comment #9 by John McGrath on 2011 08 08

Municipal government is supposed to provide services that are approved by the local council. When municipal workers, police and fire, were allowed to form unions in the 60's, that was the start of the slippery slope. Union leaderships brought in sweetheart contracts and along with them pensions. While no one wishes to deny anyone a pension for honorable work, the question arises is how much is enough? No one checked to see if the taxpayers could afford these plans. With a total of 155 individual retirement plans in Rhode Island, one can see that the unions have had a field day with this process. Allowing COLA's into pensions plans is unheard of in the private sector. Also, no private sector plan allows for benefits after twenty years of service. This one single item is responsible for the break down of municipal government. Who in their right mind can retire at the age of 44? This is an abuse and needs to be reformed.

Comment #10 by Lance Chappell on 2011 08 09

@Lance
Who allowed the unions to have a field day? It sounds like you're making excuses for the politicians. They're not mentioned even once in your comments.

Comment #11 by Max Diesel on 2011 08 09




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