Even as officials in Washington pledged to cut domestic spending, the city of Central Falls, R.I., landed in bankruptcy court on Monday, a stark reminder that some American cities already have debts so overwhelming that no amount of belt tightening can set things right.
“This is not simply a Central Falls issue — this is a statewide issue and even a national issue,” said Gov. Lincoln Chafee, an independent who served as a Republican in the United States Senate. “We have to match our revenue to our expenditures.”
Central Falls got into trouble, above all, by promising its police and firefighters generous retirement benefits without ever setting aside enough money to pay for them. The benefits were often set by outside arbitrators, under a state law that gave rise to uniform benefits across the state, even in towns too poor to afford them. Weak accounting rules masked the problem until too late.
Now Rhode Island’s smallest city is struggling with the same problem as Washington — the biggest overruns are in the programs that are hardest for any elected official to cut, old-age pensions and retiree health care.
After spending weeks trying in vain to get its retired police and firefighters to accept benefit cuts, Central Falls now expects to impose just that in bankruptcy court. The retirees will get smaller pensions, in some cases so much smaller that the city offered “circuit breakers” to make sure no one’s benefit fell below $10,000 a year. At the same time, the retirees will have to pay a portion of their health care premiums.
Meanwhile, Central Falls’ bondholders appear to be unscathed, thanks to a state law passed just last month, clarifying that the bondholders have a secure interest in property taxes, which continues even in bankruptcy.
It is much the same decision that officials are struggling with in Washington and in the European Union: whether public workers or bondholders should suffer, and how much. Rhode Island’s decision to spare bondholders, because its cities need to be able to finance their operations, is one that’s likely to be repeated in painful steps in other states and cities across the country.
Municipal bankruptcy filings have been rare, mostly involving small single-purpose districts, rather than cities or counties. But there could be an uptick, as cities struggle with reduced property tax receipts, states cut back on aid, and federal expenditures for programs at the local level dry up. Jefferson County, Ala., has also said it will decide this week on whether to declare bankruptcy, and Vallejo, Calif., has been in Chapter 9 for a grueling three years.
Elsewhere, cities like Harrisburg, Pa., have sought relief in special state programs that offer some of the same tools as the federal bankruptcy law. Rhode Island created such a program last year, and several mayors say they are considering it, because even after raising taxes, laying off workers, and selling public assets they cannot get ahead.
“Services have been cut to the bone,” said Central Falls’ state-appointed receiver, Robert G. Flanders, who spoke alongside Governor Chafee. “Taxes have been raised to the maximum level allowable.”
Article source: http://feeds.nytimes.com/click.phdo?i=68a6823134917c647eb44ea1241c09da
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