What happens when the last backstop falls?

The smallish city of Central Falls, RI is making national news today by declaring bankruptcy, joining a small but growing group of municipal entities across the country that have been driven to that radical step by years of budgetary excess.  How and why did it happen? Here are a few telling excerpts from the Associated Press:


 Receiver Robert G. Flanders described the step as one of last resort after city taxes had been raised and services cut “to the bone,” and after municipal retirees and current workers failed to agree on deep – but voluntary – cuts to their pensions and benefits…

Flanders had earlier indicated that seeking Chapter 9 bankruptcy protection in federal court – a rare step for a municipality – might be the only option without major concessions from retirees and union groups. Retirees, for instance, were asked to take cuts of up to 50 percent to their pensions and to contribute a sizable amount to their health benefits. Only 12 of 141 retirees agreed to Flanders’ proposal before last Thursday’s deadline, and of those 12, nine would not have seen their pensions reduced…

Central Falls, a 1.3-square-mile city of 19,000 residents about a 15-minute drive north of Providence, has $80 million in unfunded pension and benefits obligations and deficits of $5 million or more projected for each of the next five years. The city has found itself the subject of national headlines over its floundering finances and a high school so troubled that all its teachers were fired in one fell swoop last year, but eventually rehired.

Flanders said Monday that the city had irresponsibly entered into unaffordable agreements with retirees. Officials have said it was also hard hit by a loss of state aid and expected revenue from the Wyatt Detention Facility that never materialized. Flanders’ predecessor as state-appointed receiver, Mark A. Pfeiffer, also cited a “culture of government” that allowed the fiscal crisis to grow…

 Democratic state Rep. Agostinho Silva has lived in Central Falls for 27 years. He said he worries that no matter what happens in bankruptcy court, someone is going to pay – literally and figuratively – for the city’s financial problems. Tax increases and service cuts hurt residents, he said. Layoffs or pension cuts hurt city workers and retirees.

“One way or another someone is going to get hurt,” he said. “I just want what’s best for the city and to make sure our residents are not overlooked.”

Here, illustrated in stark relief, is exactly what fiscal conservatives mean when we say that across the country government employee benefits have become unsustainable.  Unsustainable – as in, cannot be sustained

Earlier this month, city retirees in Central Falls were presented with an ugly proposition: agree to cuts in annual pension payments as high as fifty percent to allow the city to stabilize its finances.  In return?  Well, in return they’d have gotten some assurance that the remaining fifty percent would keep coming.  As noted above, the retirees overwhelmingly rejected the offer, many no doubt assuming incorrectly that the threat of bankruptcy was contrived; just an aggressive negotiating tactic intended to wring further concessions out of them.  They were wrong, and now they face the very real possibility of losing their pensions entirely.  It is a terrible, appalling situation.

How did Central Falls bring itself to such a dire turn?  Here’s an excerpt from a recent in-depth article in the well-known conservative mouthpiece, the New York Times:


The city, just north of Providence, is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York. These uniformed workers can retire after just 20 years of service, receive free health care in retirement, and qualify for full disability pensions when only partly disabled.

Just over one square mile, Central Falls has a tightly packed population, filled mostly with immigrant families, that struggles on a median household income of less than $33,520 a year, according to the Census Bureau’s 2005-9 American Community Survey. The typical single-family house, after a recent revaluation, is worth about $130,000. It is hard to see how anyone thought such an impoverished tax base could come up with an additional $80 million for retirement benefits. If the city were contributing the recommended amount to the plan each year, it would take 57 percent of local property tax revenue.

Daniel L. Beardsley Jr., executive director of the Rhode Island League of Cities and Towns, said it was not the city’s idea. Other states limit what can be decided in collective bargaining, but Rhode Island’s law says that for police and firefighters, “wages, hours and any and all terms or conditions of employment” are subject to negotiation.

“That means even the length of a mustache,” said Mr. Beardsley, who over many years has represented Central Falls and other municipalities in contract negotiations. Talks broke down more often than not, he said, and then the same state law called for binding arbitration, which for many years was a clubby process that emphasized comparable benefits all across the state more than any city’s ability to pay.

“It was a domino effect,” he said, leaving Rhode Island with the nation’s highest per capita spending for fire services and sixth-highest for policing. (The binding arbitration law does not apply to public workers other than police officers and firefighters in the state, although some want it extended to teachers.)

It is nearly impossible to write about the impact of collective bargaining on state and local budgets without being cast immediately as “anti-worker.”  But I’m neither anti-worker nor anti-retiree (honestly, is anyone?).  And while I do believe that union leaders bear a significant share of the blame for the situation that more and more state and local governments are finding themselves in, in truth the blame is most appropriately assigned to state and local officials who in bargaining period after bargaining period have agreed to terms that they had to have known could not be sustained over the long haul.  Math is math.  Union leaders are elected to represent the very narrow interests of their members.  And while a good argument can certainly be made – with Central Falls and other municipalities like it as Exhibit A – that by insisting on unaffordable benefits those leaders were in fact dooming their members exactly to the devastating outcome playing out in Rhode Island this week, it is hard to criticize them too harshly for years of successful advocacy.  State and local officials, on the other hand, are supposed to represent much broader constituencies.

Oh, hardball politics played a role, certainly.  With mandatory dues devoted to political activity and their membership constituting what is essentially a standing Election Day army, in many jurisdictions union bosses wield political clout wholly disproportionate to their numbers.  A lot of elected officials allow themselves to be strong-armed, no doubt.  But that cannot explain all of it.

As important, I suspect, is what I’ll call the backstop assumption.  For years, underlying every local budget debate has been the unspoken assumption that if things got really bad, the state could be counted on to serve as a backstop.  With a broad-based tax increase, maybe.  Or “local option” authority to raise more tax revenue.  And of course at the state level, there is a corollary assumption of a federal backstop… READ THE REST at CriticalMASS

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