Only 39 Cities and Towns

You only have to look at Rhode Island to appreciate how truly small the state is; driving through it on the I-95 confirms that underlying assumption. With a population of just over one million, it is hardly a vast and economically diverse state, and while the mega-estates of Newport – home to some of the largest mansions in the entire country – suggest general opulence, Rhode Island is generally a hard-working, blue collar New England venue with a pretty average per capita. It is also a state with 39 towns and 36 pension plans of which 23 such plans have been designated “at risk.” The total dollars at risk are low by most state standards, but unlike most larger states, Rhode Island simply lacks the size to deploy fiscal shock absorbers – which even heavily debt-laden California and Illinois have in place – to guarantee the obligations of most of its cities and towns. Some believe the Ocean State may soon be sinking.

While Rhode Island has recently revamped its state bond laws to stay on the right side of solvency, many of its municipalities are staggering under the weight of their individual pension obligations. They are looking, perhaps vainly, for state guarantees as they face possible insolvency or even bankruptcy under Chapter 9 of federal bankruptcy law, a statute seldom invoked since states have generally rallied to the aid of their failing municipalities. The two most recent Chapter 9 filings, California’s Orange County in 1994 and Cleveland, Ohio’s effort in 1978, suggest that such filings also have a ripple effect that taints neighboring cities and towns and can make bonds from those neighbors more difficult to place, generating higher interest costs as well.

But with so many pension plans at risk, Rhode Island has let it be known that it might not be able to bail out its municipalities. The mood in Washington, D.C. also suggests that federal aid is unlikely come anytime soon. Given the tiny size of the state, however, any pension insolvency is likely to infect virtually every Rhode Island town, possibly even triggering a domino of municipal bankruptcies. At the center of the immediate crisis is Center Falls, a small but insolvent northern Rhode Island town that filed for formal Chapter 9 bankruptcy as of August 1st: “The impoverished city, operating under a receiver for a year, has promised $80 million worth of retirement benefits to 214 police officers and firefighters, far more than it can afford. Those workers’ pension fund will probably run out of money in October, giving Central Falls the distinction of becoming the second municipality in the United States to exhaust its pension fund, after Prichard, Ala.” New York Times, July 11^th.

Central Falls, with under 20 thousand people, succumbed to a sweeping municipal tendency in the last few decades of bestowing very generous and unsustainable pension benefits for municipal workers, particularly among police and firefighters: “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 (maybe not anymore!) 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.” NY Times. Local officials have asked such uniformed services retirees for voluntary cuts to their pension benefits to save the town, but that path didn’t produce sufficient savings . Chapter 9 will.

Indeed, as Congress struggles to cut programs and find a balancing point in an effort to raise the U.S. debt ceiling, there is a mood to shift increasing burdens onto state and local governments, which are ill-prepared to stretch their tattered budgets any further. As U.S. austerity efforts are already creating stock market jitters and failing unemployment rates, the potential for serial municipal bankruptcies and even failed states looms as one of the hidden icebergs that could easily sink the “recovery” that we are all hoping for.

I’m Peter Dekom, and Rhode Island, like a number of U.S. states, is leaving an awful lot of its future to Providence.