Ten Ways to Save Providence from Bankruptcy
Wednesday, February 08, 2012
If Mayor Angel Taveras wants to keep Providence from going broke, he’ll need to think outside the box in order to address the city’s fiscal woes, according to various economic experts, politicians and a former Mayor.
Taveras has continuously called bankruptcy a “last resort” in his attempt to save his cash-strapped city, which faces between a $22.5 million and $30 million deficit in the current fiscal year and a projected $30 million deficit in 2013.
Taveras has indicated he will consider a freeze on cost-of-living adjustments, cuts to retiree health benefits and potentially a supplemental tax increase on property owners.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTBut those aren’t the only options the Mayor should consider, experts say. GoLocalProv breaks down the top ten ways Providence can avert bankruptcy.
Cut Health Benefits
Judge Sarah Taft-Carter’s ruling last week that retirees are entitled to lifetime health benefits and that the city could not switch them over to Medicare after they turn 65 helped kick off the bankruptcy conversation. Now Taveras is planning to take his case to the State Supreme Court and former Mayor Joe Paolino said he thinks there is a good chance the high court could rule in favor of the city.
“Hopefully they’ll have a sensitivity because the Chief Justice was a legislator and he understands the plight of cities and towns,” Paolino said. “And I think they will realize that the capital city needs assistance from them.”
Force Colleges to Pay Fair Share
Mayor Taveras has said all of the city’s tax-exempt nonprofits need to come to the table and pony up the $7.1 million in additional voluntary payments he is asking for. But Ken Richardson, who was a member of the Mayor’s municipal finances review panel last year and served as the Providence Democratic Party chairman, said the city should look into taxing property not used directly for education purposes as well.
“Immediately send out a tax bill to colleges on the full value of their dormitories. These are not tax exempt properties,” Richardson said. “They are built for the selling point of recruiting students, who most want to move away from home. Also, they are a huge revenue stream for the colleges, nothing more.”
Providence City Councilman David Salvatore said cutting health benefits and forcing the tax-exempts to pay up are the two top priorities.
“On the revenue side, we need our tax exempts to pay their fair share,” Salvatore said. “On the expenditure side, we must address the growing cost of our retirees. Both of these parties must realize that the sense of urgency is greater than ever before, and they must also realize that Administration and I are prepared to get results one way or another.”
Freeze COLAs
The top 25 pension recipients in the city make over $109,000 thanks to five and six percent compounded COLAs awarded to them over two decades ago. The most glaring example is former Fire Chief Gil McLaughlin, whose salary at the time of his retirement was $63,510.72. He now makes $196,813.08.
“There are more than 600 retirees collecting 5 and 6 percent compounded yearly raises,” Taveras said last week. “These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars of year.”
Paolino said Taveras must move toward ending the COLA system as it currently functions.
“The intent of COLAs was to help retired police officers and firefighters that had retired back in the ‘40s or ‘50s, Paolino said. “It wasn’t to help a former fire chief who retired at 60,000 and makes 190,000.”
End Longevity
More than 1,000 city employees were collecting longevity pay (which they receive after seven years with the city) according to a 2010 report by WPRI. That year, the payments added up to over $4 million. Paolino said the Mayor should move to end longevity pay for employees in all departments
“Why do you get a longevity pay? You already have a job,” Paolino said. “I’ve always wondered this myself.”
Create a Police and Fire Sub Pool
Last year, the municipal finances review panel offered several suggestions for how to help the city reduce a $110 million structural deficit. The city followed through on many of those suggestions.
But one that the city should still be looking into, according to Richardson, is the creation of a substitute pool for the fire and police departments. Richardson says the benefits would be twofold: The $1 million per month spent in overtime between the two departments could be significantly reduced and the city would instantly be able to hire new firefighters and police officers when retirements take place.
“Setting up a substitute pool of firefighters and police to cover absenteeism, somewhat like the teachers do. This would save millions on overtime and call back,” Richardson said.
Zero-Based Budgeting
Another option, according URI business professor Dr. Edward Mazze, adopt a zero-based budgeting system where departments start their budgeting process from zero and justify all expenditures.
“Once a new city budget is prepared with this system, the Mayor should select from one of three models: reduce expenditure requests by ten percent and develop a contingency account, fund the budget with the amounts requested or reduce requests by five percent and use the five percent as incentives to reward individuals who have increased productivity and/or efficiency. Management must be held accountable for operating their departments within the budget. If zero-based budgeting were adopted, there would be savings in the tens of millions of dollars.”
Borrow Money from State
It might be considered “kicking the can down the road,” but a cash advance or a loan from the state is not out of the realm of possibility. East Providence and Pawtucket have each been granted $12.6 million advances this year and when the city’s shortfall balloons to nearly $46 million in July, an advance on PILOT payments from the state might be one way to make payroll. Tax Anticipation Notes (TANs) and an advance on education aid are two other options.
But former Auditor General Ernest Almonte believes any type of borrowing is the not the best way to help the city in the long run.
“That is not a way to solve the problem,” Almonte said.
Sell Off Assets
It might be another one-time fix, but selling off some of the city’s most valuable assets could be an option if bankruptcy is truly the last resort. Unlike Central Falls, Providence does have plenty it could sell in order to address immediate problems and Richardson said that might be what a judge eventually suggests.
“Bankruptcy could be very tricky considering all the assets the city owns,” he said. “Will the bankruptcy attorney and judge tell the city to sell the water supply board? Big asset worth hundreds of millions. Maybe that is the first thing the city should consider. Considering Cranston sold their sewer systems 15 or more years ago, there is precedent.”
Freeze Overtime/New Hiring
An option that is being pushed for by at least one Councilman is to immediately freeze all overtime and new hiring until the city gets its finances in order. This route is easier said than done, particularly with public safety overtime, but a hiring and/or promotion freeze is something the city can likely agree to in order to begin saving money right away.
Regionalization
The regionalization conversation comes up in Rhode Island nearly every year, but rarely does anything develop. However, with cities and towns across the state struggling financially, might it be time to get serious about communities sharing services? URI economist Dr. Leonard Lardaro believes it is.
“At some point, I have to believe the loss of aid could well force them to begin merger talks for municipal and possibly educational services,” Lardaro said.
But Mazze said he doesn’t believe regionalization will help the capital city because too many of its neighboring cities are also struggling.
“Mergers with other cities and towns in trouble will not solve Providence's financial situation nor will consolidating services with some of these cities and towns,” Mazze said.
Receivership
Paolino said he believes another option is or the city to go into receivership and to have Mayor Taveras appointed as the receiver. This would give Taveras more flexibility when it comes to altering retiree benefits and current union contracts.
Paolino said Taveras does not deserve to be pushed aside to watch an outsider take over the city’s day-to-day operations.
“I think the mayor is doing a great job in handling this,” Paolino said. “He's got the right temperament. He's trying to save employees and he's trying to save the taxpayers. I give him a tremendous amount of credit for the way he's doing this.”
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