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The chapter 9 bankruptcy filing of Central Falls, RI has captured a great deal of attention in the business press. Tales of a city in decline and crushing pension and healthcare obligations makes for good copy. But not enough attention is being paid to the fact that, while the finances of Central Falls were dire, the stresses that city faced are being faced in municipalities across the U.S.A fascinating snapshot of the depths of the hole many municipalities find themselves in can be found in “Status of Pension and OPEB Plans Administered by Rhode Island Municipalities,” a March 2010 report by Acting Auditor General of Rhode Island, Dennis Hoyle.
I have isolated some of the more egregious fiscal disasters in the following exhibits. The numbers speak for themselves.
Author Dennis Hoyle makes a few points in this report worth repeating:
The actual rates of return for Rhode Island’s locally administered pension plans supports the conclusion that smaller plans struggle to achieve the same rates of return earned by larger, well diversified and professionally managed plans. Further, larger plans are better able to manage investment risk through diversification.
At $2.4 billion, the newly disclosed unfunded liability for other post-employment benefits provided by municipalities (“OPEB” – generally retiree healthcare), overshadows the collective unfunded liability for all locally administered pension plans which now totals $1.9 billion.
Central Falls and other struggling cities of Rhode Island are not outliers that can be dismissed. The recession of 2008-9 and the tepid recovery have drastically impacted the financial health of municipalities across the U.S. We have now reached the point that the cost of servicing retiree obligations is severely restricting the abilities of local governments to continue to provide services.
As the weakest and most challenged municipalities brave the bankruptcy courts the taboo of a chapter 9 filing is likely to be broken, and other local government leaders could pursue that option in order to restructure fundamentally unsound financial and non-financial obligations.
Bondholders are going to take losses as this situation plays out over the coming years. Fixed income investors congratulating themselves on the priority of their claims over retirees should revisit the Chrysler bankruptcy, or audit a political science class.
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].
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