In the wake of Central Falls’s bankruptcy filing last Monday, lawmakers and local officials across the Ocean State have had to come to grips with the fact that the tiny city’s fiscal “issues” are not unique.
As you may remember, Central Falls’s financial woes are primarily the result of the city’s $80 million unfunded pension liability.
The city was forced to file for bankruptcy after union retirees failed to agree to concessions that would have slashed pension benefits by as much as half.
The filing was a wakeup call for Rhode Island, which is suffering from widespread pension crises. Combined, the state’s municipal pension plans are only 41% funded, and face an unfunded liability of $2 billion. Rhode Island’s unfunded obligation (at the state level) is $6.8 billion, and some experts argue it could actually be as high as $9 billion.
“Unless there’s pension reform, Central Falls may not be the last municipality in Rhode Island that faces bankruptcy,” Gary Sasse, who is helping Providence with its financial reforms, told Bloomberg. “No question Central Falls was unique and was an economic basket case but there are other communities in the state with locally administered pension plans that are in serious trouble.”
In West Warwick, for example, a “sizable” unfunded pension liability led Moody’s Investment Services to downgrade the town’s credit rating Friday to Baa1, just two levels above junk bond status.
According to the ratings agency, West Warwick has an unfunded pension obligation of about $98 million, and the town’s public pension fund is only about 26% funded. The town’s pension fund could run out money in just 8 years, which would force it to dip into the general fund budget and put a major strain on municipal finances.
“If it keeps going the way it is, we’ll be right there with Central Falls in five years,” West Warwick Council President Angelo Padula told the Providence Journal today. “”It’s not only the pensions. The school department is killing us and the taxes keep going up.”
The Mayor of Woonsocket, R.I., also wouldn’t rule out bankruptcy as an option for his cash-strapped city. According to ProJo, Woonsocket was forced to borrow more than $11 million to cover last year’s budget shortfall; the state is now working with the city to authorise deficit financing to close this year’s budget gap.
Woonsocket and other cities will get a little bit of relief from a provision in this year’s state budget, which allows cities and towns to move public-sector retirees to Medicare when they turn 65. Woonsocket city officials hope the measure will save the city $250,000 this year, according to ProJo.
The budget relief could also save Providence up to $11 million this fiscal year. The capital city faces an unfunded liability of nearly $594 million, according to a 2010 state auditor report. Providence managed to close a $110 million structural budget deficit this year by negotiating union concessions, but it is still not in the clear.
All eyes are now on Central Falls to see if Chapter 9 municipal bankruptcy can help local governments solve their pension problems. Chapter 9 was not established to deal with the issue of unfunded pension obligations, and no court has issued a definitive ruling as to whether a city can cut base pension payments in bankruptcy.