Tom Sgouros: All Central Falls, All The Time
Saturday, August 06, 2011
I'll write more about Central Falls and the sordid history of its relationship with the rest of the state on Monday. For now, a couple of points worth remembering when reading news about that fair city. For reasons I really don't understand, these points almost never surface in news coverage of the bankruptcy. Tell me: are they actually irrelevant or is it just convenient to ignore them if you want to blame it all on retired librarians?
State aid to city slashed
In fiscal year 2007, Central Falls was the recipient of about $3.9 million in aid from the state. By fiscal 2011, that had dropped to $630,000. (Those were years in which the state was cut taxes by a lot, but only for wealthy people.) This amounted to about a 20% cut in the city's budget in four years from state cuts alone. Quite a lot of that money was cut from budgets midway through the fiscal year. The foreclosure crisis cost the city a lot of revenue, too, but the state cuts were devastating, and it's only wishful thinking to believe this wasn't what pushed the town over the edge. Policy makers in the state house decided in 2007 to push their own fiscal troubles onto the cities and towns and bankruptcy in Central Falls was the entirely predictable result.
In 1991, 20 years ago, the state took over the Central Falls school system and has run it ever since. This happened because it was apparent back then the city did not have the capacity to raise the revenue necessary to support the state Basic Educational Program (BEP). In other words, it has been clear for a very long time to anyone who could count that Central Falls couldn't support its own services.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe same forces that created the situation in 1991 have continued to work. According to the table below, in 1993, Central Falls had one-ninth the resources of East Greenwich to pay for its local services. As of 2007, it had one-sixteenth. Can this be blamed on greedy firefighters?
The city's resources
I made the table above a couple of years ago from documents published by the state education department. The table shows thousands of dollars of property value per student in the schools. It's a pretty good measure of a town's capacity to fund services from local revenue, because it is both a measure of the town's taxable assets, and seems to be a better proxy for the demands on town services than simply the per capita value.
Apart from Narragansett, which in 1950 had only 400 students in its schools, the richest places in the state back then were, in order, Providence, Pawtucket, Woonsocket, and Central Falls. By the 1960s, they had sunk dramatically, overtaken by the new suburbs. Still, as late as the early 1980s, Providence was still only halfway down this list. By the early 1990s, the list had assumed its modern shape, and what were once the richest places in the state had become the poorest. Since then, the order in the list has remained pretty much the same, but the distance between the top and bottom has grown substantially.
What explains the movements on this list? Lots of people want to blame Central Falls's plight on unions and corruption. But look at what happened to Johnston over that 50 years. It has unions, and it is, shall we say, no stranger to official malfeasance, and yet it's a richer place than it was 60 years ago. How about Cranston, Warwick, or North Providence? Cranston and North Providence have seen little change, and Warwick has moved up many places. Do unions somehow have an effect on Central Falls and not on Cranston or Warwick?
Of course, unions exist to keep wages up. And official corruption -- a blot on our honor deserving nothing but condemnation -- can be expensive. But neither of these can explain why the fourth-richest city in the state is now by far the poorest because the same factors were present in cities that moved in exactly the opposite direction on the list.
In fact what we're seeing on this list is just evidence of the suburbanization of America. Over the last 60 years, property values in cities across the nation dropped while values in suburbs rose. This was the biggest demographic shift in our nation's history, and has precisely nothing to do with the management of the city of Central Falls. This has a flip side: management in East Greenwich or Lincoln has not been so much more enlightened than in Central Falls, but it's easier to manage a budget when your revenue rises 3% every year than when it falls 3% every year.
But after all, there's more sport in blaming retirees or a corrupt Mayor than there is in seeing it as a symptom of a larger problem in which lots of us participate.
Bonds
Last year, when Central Falls first went into receivership, the General Assembly passed a new law to say that bondholders would be first in line to get the money the city owes them. This is a state law, and is essentially unique to our state. Typically bondholders of some bankrupt company stand in line along with all the rest of the creditors -- that's why a high credit risk pays a higher interest rate. But the General Assembly has deemed the insurance companies and banks who hold Central Falls bonds to be more important to pay than the librarians. State Farm gets 100 cents on their dollar, and retired janitors are to get 50 cents.
There is a perspective from which this makes sense. Over the past decade, low interest rates have persuaded both the state and many municipal governments that it's a good idea to run your town in a way that's hugely dependent on the bond market. At the state level, but also in town after town, we've traded a sensible cushion in the budget for lower taxes. After all, when you can borrow at almost nothing for short-term loans, you can always cover a cash-flow problem with bonds. The state has made extensive use of these "tax anticipation notes" over the past decade, as have many cities and towns. We also rely on the bond market for financing capital improvements, even though most towns have the resources to finance projects themselves. The bond market is convenient and cheap -- now. But now that so much of our government is dependent on these low rates, there will be serious trouble when interest rates rise. And they may not rise soon, but they will.
In other words, in order to protect short-sighted financial practice like TANs -- what was once called imprudent -- we will put the screws to people living on a fixed income. Hooray for the modern age.
Incidentally, this new law is a state law and the bankruptcy is in federal court. With little relevant precedent for this kind of state interference in federal bankruptcy law, it will almost certainly be litigated. Stay tuned.
The jail
The Wyatt jail has fallen on hard times. Negligence and low staffing levels -- essentially the point of privatization -- led to the death of an inmate a couple of years ago, and the federal agencies that had been using it have cut back. But the jail has chosen to stiff the city instead of its investors, and so they're more than $1.5 million in arrears on promised payments to the city. An attempt to change state law in order to revoke the jail's tax-exempt status and allow the city to collect its debt via taxes was introduced in February, but was held until June and then changed to a commission that would study the issue. In other words, not only has the Assembly cut state aid to Central Falls over the past four years, but they have actively prevented the collection of debts owed to the city.
Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
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