Last year I documented the saga of the city of Central Falls, Rhode Island, which went into state receivership only to be “rescued” by a new state law which prohibited municipalities from using traditional court receiverships in favor of a new state takeover mechanism.
Central Falls became a model of what could go wrong when fiscal mismanagement mixed with burdensome union contracts pushed a government’s ability to service its obligations to the brink.
Any illusion that Central Falls could be rescued is dimming quickly, as the state receiver appointed to run Central Falls has just announced that bankruptcy is on the horizen, as reported by The Providence Journal:
With a legal fight still raging over the state’s attempts to rein in the cost of its retiree health and pension benefits, Central Falls receiver Robert Flanders is seeking “significant voluntary concessions” from retirees in the battered city he is trying to pull back from the brink of bankruptcy.
In a letter that went out Friday to retired members of the Central Falls police and fire departments, he requested a meeting on Tuesday, July 19, to discuss the potential for a cost-saving compromise that could help avert a bankruptcy that could jettison the city — and it retirees — into unchartered legal territory.
A big part of the city’s $4.9-million operating deficit is due to the $3.4 million in required pension contributions which Flanders has said the city can’t afford to make for the full budget year unless there are parallel spending cuts.
The lesson of Central Falls extends far beyond Rhode Island, as public sector pension obligations are choking municipal finances. As Steve Malanga writes:
Pensions are an enormous part of the problem. New Haven’s $475 million budget, for instance, is projected to grow by just $4 million this fiscal year, but the city’s pension and health-care costs will rise $12 million, forcing cuts elsewhere. In San Francisco, pensions consume about 14 percent of the budget, and rising retirement bills for city workers accounted for one-third of this year’s $306 million deficit. Pension and health benefits account for 20 percent of the $500 billion that the nation’s nearly 14,000 public school districts spend annually. In a recent National League of Cities survey, nearly 80 percent of municipal finance officers listed rising pension payments as one of their most significant budgetary problems.
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