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Threat of Muni Bankruptcy Hangs Over Providence, Rhode Island

Harris Kenny
January 31, 2012, 6:50pm

The threat of municipal bankruptcy hangs over Providence, Rhode Island, Dan McGowan of GoLocalProv reports:

“Concerns are mounting over whether (Providence, Rhode Island) can remain afloat in light of cash flow problems, a $22.5 million budget shortfall and a court ruling that sided with retirees over the city in a healthcare dispute.

Now economic advisors and former mayors are saying Providence is nearing a breaking point and all options to solve the cash-strapped city’s financial woes must be on the table, including a tax hike, a cash advance from the state or a potential bankruptcy.

The city took another blow Monday when Judge Sarah-Taft Carter ruled it could not switch retirees over to Medicare after they turn 65 because they were guaranteed lifetime health coverage from the city. While the decision came as no surprise to the Taveras administration, it does leave about $8 million in assumed savings in the fiscal year 2012 budget at risk.

‘Mayor Taveras is extremely concerned and disappointed with the decision,’ said city spokesman David Ortiz. ‘He and his staff are still reviewing the 47-page decision and reviewing our options.’

Taveras acknowledged over the weekend that a potential supplementary tax raise was one option for addressing the city’s immediate financial problems and he suggested that a ten year cost-of-living-adjustment (COLA) freeze for retirees is something he is considering as part of tackling the city’s massive unfunded pension liability.”

(HT Reuters.com contributor Cate Long via Twitter)

Providence appears poised to join the ranks of other high profile U.S. municipal bankruptcies, which I outline in a previous blog post here. The situation in Providence is reminiscent of the municipal bankruptcy in Central Falls, Rhode Island last year since both cities are grappling with unsustainable public employee benefits. As former Mayor and City Council President John Lombardi told GoLocalProv

“I’ve been trying to tell everyone this for many, many years and they thought it was personal,” Lombardi said. “It was never personal. I talked about this back in 1994. Had the previous administrations had the intestinal fortitude, we could have taken care of this years ago.”

In November I described the situation in Central Falls on Reason Foundation’s Out of Control Policy Blog here:

Falling revenue combined with spending was problematic, but it was the (Central Falls') underfunded public employee pension fund that drove Central Falls into bankruptcy and receivership. Rosy pension predictions were flat wrong and the controversial government accounting standards board (GASB) metrics may lead to similar problems for other municipalities.

Standing in contrast is Jefferson County, Alabama and Harrisburg, Pennsylvania where local politicians got in over their heads approving high-risk projects that went sour. Jefferson County filed the largest municipal bankruptcy in U.S. history this past November. Meanwhile, Harrisburg’s City Council filed for Chapter 9 bankruptcy, which a federal judge denied. The ruling is being appealed and the city is currently under state receivership. 

The takeaway from both Central Falls and Providence is that these governments are operating in a fundamentally unsustainable manner. The trope that policymakers shouldn’t “kick the can down the road” has been especially popular recently, however current events (notably in Europe) suggest an increasing number of governments have now reached the end of the road and face no choice but to get their books in order. 

For more of Reason’s work on municipal bankruptcy, see my previous posts here and here. For more on this topic, see Reuters.com’s MuniLand blog, which is a daily must-visit for anyone interested in municipal public finance issues. 


Harris Kenny is Policy Analyst


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