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Is Providence Going Belly Up?

Tuesday, January 31, 2012


Concerns are mounting over whether the capital city can remain afloat in light of cash flow problems, a $22.5 million budget shortfall and a court ruling that sided with retirees over the city in a healthcare dispute.

Now economic advisors and former mayors are saying Providence is nearing a breaking point and all options to solve the cash-strapped city’s financial woes must be on the table, including a tax hike, a cash advance from the state or a potential bankruptcy.

The city took another blow Monday when Judge Sarah-Taft Carter ruled it could not switch retirees over to Medicare after they turn 65 because they were guaranteed lifetime health coverage from the city. While the decision came as no surprise to the Taveras administration, it does leave about $8 million in assumed savings in the fiscal year 2012 budget at risk.

"Mayor Taveras is extremely concerned and disappointed with the decision," said city spokesman David Ortiz. “He and his staff are still reviewing the 47-page decision and reviewing our options."

Taveras acknowledged over the weekend that a potential supplementary tax raise was one option for addressing the city’s immediate financial problems and he suggested that a ten year cost-of-living-adjustment (COLA) freeze for retirees is something he is considering as part of tackling the city’s massive unfunded pension liability.

Former Auditor General: A Serious Setback

But former Auditor General Ernest Almonte, who helped prepare a report on the city’s fiscal health last year, said the real issue for Providence is that it isn’t being given the tools it needs to address its problems. The city faced a $110 million structural deficit for 2012 and the budget included several assumptions that have not come to fruition, most notably the $7 million in additional funding from tax-exempt institutions and the $8 million in savings expected from switching retirees to Medicare.

Almonte called Taft-Carter’s decision a “serious setback.”

“You can’t keep taking away the tools needed to address the problem or you’re going to have cash flow problems,” he said.

Almonte said state oversight was one potential option if the city’s credit rating were to drop, although he believes that would be unfair given the work the administration and the City Council has done to take on what Taveras last year called a “category five fiscal hurricane.”

Almonte said bankruptcy, which Taveras has said is an option if COLAs aren’t frozen, would be a poor strategic plan. He said he hopes the city can solve its problems before going down that route, but said it will take a lot of help, particularly from the tax-exempts.

“I hope they take a second look at this because this is real,” Almonte said of the nonprofits. “It is a fact.”

Former Mayors: Changes Needed

Before resorting to bankruptcy, two former mayors said Monday that the city should look to borrow money (much like Pawtucket or East Providence) or make more cuts.
“I think that [bankruptcy] would be an embarrassment to the capital city,” said former Mayor and City Council President John Lombardi. “I think it would be a major, major blunder that we'll never recover from. This would have ramifications across the state and throughout New England.”

Lombardi questioned whether the consolidation of departments with other cities and towns has been seriously considered and said he believes the conflict with the tax-exempt institutions dates back to Congressman David Cicilline’s tenure as Mayor. He called Cicilline’s approach “confrontational” and noted that the nonprofits could simply pull their payment in lieu of taxes agreement at any time.

He also said he’s been pointing at the city’s pension problems for nearly two decades. Similarly, Taveras has said the he biggest issue the city of Providence has on pensions is the five and six percent compounded COLAs given out in 1989 and 1990, when the Mayor was still in college.

“I’ve been trying to tell everyone this for many, many years and they thought it was personal,” Lombardi said. “It was never personal. I talked about this back in 1994. Had the previous administrations had the intestinal fortitude, we could have taken care of this years ago.”

Former Mayor Vincent "Buddy" Cianci called the city’s woes a “perfect storm -the economy, cuts in state aid and the ineptness of Cicillline.”

Cianci said he believes Taveras and the Council are doing a good job in attempting to address the issues, but that the budget clearly had a lot of assumptions that haven’t materialized. He said those numbers are adding up in a hurry.

Cianci said a state overseer may be one option.

“I think if they don't make some real strong changes, the city will need adult supervision,” he said.

Fiscal Advisor: Bankruptcy Should be Last Resort

Former city Democratic Party chairman Kenneth Richardson, a CPA who worked closely with Almonte on the city’s financial review panel last year, said the city’s cash flow problems could result in vendors not getting paid and the possibility of some services coming to a halt. He said if this year’s budget stays in the red and next year’s budget cannot be balanced the long term affect could be a lowered bond rating.

Richardson said the city has followed through on some of the recommendations in the review’s panel’s report, but “there were more in there that could be substantial like limiting retiree pensions to a percentage of the rank or class the employee retired at so you don't get a fire chief earning 50 percent more than the current working chief and 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 supplemental taxes would be a major blow to the city.

“Supplemental taxes could just mean more business that do not want to locate to Providence, the housing market gets tougher to sell, rent increases to afford the tax payments, and more foreclosures,” Richardson said. “You can see that this trickles down to many other issues, not just financial.”

And bankruptcy?

“It’s always an option, but more severe cuts in costs and services should be looked at first,” he said. “Bankruptcy should only be used as a last resort.”

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