March 5, 2021

Small City, Big Debt Problems

“This is not simply a Central Falls issue — this is a statewide issue and even a national issue,” said Rhode Island’s governor, Lincoln D. Chafee, an independent, who as a senator was the only Republican to vote against the invasion of Iraq. “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 setting aside enough money to pay for them. The benefits were often determined by outside arbitrators, who were intent on resolving disputes rather than assessing whether towns could afford their promises. Weak accounting rules helped mask the scale of the problem for years.

Now Rhode Island’s smallest city has the same problem as Washington — the biggest overruns are in the programs hardest to cut, pensions and retiree health care.

After asking its retired police officers and firefighters for weeks to accept reduced benefits, Central Falls intends to impose its will in bankruptcy court. The retirees will get smaller pension checks, so small in some cases that the city is creating “circuit breakers” to make sure no one falls below $10,000 a year. Retirees will also have to pay a portion of their health care premiums.

Meanwhile, Central Falls’s bondholders appear to be unscathed, because a state law adopted last month asserts that general obligation bonds will pay even in bankruptcy.

The conundrum of Central Falls in dealing with its debt is much like the one in Washington and Europe: how far to extend the principle of shared sacrifice, and how much pain, if any, to inflict on various stakeholders, including workers, retirees, taxpayers and investors.

Rhode Island’s decision to protect its bondholders, intended to allay market fears and make sure the state’s cities can sell their bonds readily to finance their operations, will most likely be repeated by some other states and cities across the country.

Already, the mayors of three other cities in Rhode Island have said they expect to have to reduce the checks they now send retirees to bring their finances back into balance. And the state treasurer, Gina M. Raimondo, is calling for a restructuring of the state pension system that would affect both retirees and current workers.

Municipal bankruptcy filings have been rare, mostly involving small single-purpose districts, rather than cities or counties. But a number of cities continue to struggle with reduced property tax receipts, state cuts in aid, and dwindling federal expenditures for programs at the local level. Jefferson County, Ala., has said it will decide this week 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 Robert G. Flanders, the state-appointed receiver for Central Falls who spoke Monday beside Governor Chafee. “Taxes have been raised to the maximum level allowable.”

Across the country, municipal dollars are increasingly being dedicated to retirement benefits at the expense of retaining current workers and providing services, he added. A handful of men in firefighters’ union T-shirts attended the Monday meeting, held in the sweltering City Council chambers, but declined to discuss their situation. Some said they were too angry to talk. The president of the firefighters’ union, Michael Andrews, said the union needed to review the details with its lawyers before commenting.

Sharp cuts in the pensions of people who have already retired are rare. Even in the private sector, a federal pension law prohibits pension cuts unless a company goes bankrupt. The federal government then takes over and covers many retirees’ benefits in full.

Those laws do not cover state or local workers, who generally consider their pensions protected under state law. They point to statutes and court decisions that indicate once a worker has a government job, his pension plan cannot be changed for the duration of his employment.

Elected officials have been reluctant to challenge this line of thinking, because state and local pensions have become a third-rail issue, much the way Social Security has for federal politicians.

Mr. Flanders said Central Falls had no choice. The pension fund for police and firefighters is expected to run out of money in October, and the city cannot afford to pay the current benefits out of its general fund.

Central Falls had “reached a critical fork in the road,” he said.

Article source:

Speak Your Mind