Could Rhode Island Cities Face a Detroit-like Bankruptcy?
Tuesday, December 10, 2013
"It's a real concern -- Detroit isn't Central Falls," said Paul Doughty, head of the Providence firefighters union. "You could argue you can't let anything happen to Detroit, it's too big. But they just did."
URI Distinguished Professor of Business Edward Mazze warned as well that the Motor City's current situation was far from unique. "Detroit's bankruptcy reopens the issue nationally on the protection of municipal worker's pension and health benefits when a city or town has serious financial problems. The Detroit bankruptcy shows that no city, no matter how big or small, can fail and go into bankruptcy if there is poor leadership, little fiscal responsibility, namely, more spending than revenue, and little attention to a focused economic development strategy," said Mazze.
This past weekend, Providence Mayoral Candidate Brett Smiley's appearance on Channel 12's Newsmakers had Smiley acknowedging that the city's financial situation, while improved, was far from out of the woods. “If we muddle along or accept the status quo, I do think it’s possible that five years from now we could be back talking about bankruptcy," said Smiley.
Detroit Puts Pensions on the Table
"In Rhode Island, if the current court recommended negotiations on state pension givebacks including cost of living adjustments results in significant changes to the earlier agreement, and if local cities and towns get no relief in their unfunded pension and health benefits liabilities from state sources, a Chapter 9 bankruptcy filing is an option," said Mazze. "While some Rhode Island cities and town's financial situations are better than a year ago, other cities and towns are struggling to balance their budgets."
Mazze continued, "A Chapter 9 bankruptcy filing has long-term reputation, economic development, taxing, bond rating and local sovereignty implications. Using bankruptcy is an example of poor leadership. Can Chapter 9 bankruptcies happen in the foreseeable future in Rhode Island? Yes, if we continue to have individuals in office with no vision, realistic solutions to problems, no economic plan and suffer no consequences for political promises that make little economic sense."
Lawyer Joe Penza with Olenn and Penza, LLP, who had been involved in Providence's landmark pension reform, thought however that with the recent Detroit examples, more municipalities would view bankruptcy as being a viable turnaround option on the table.
"I think you'll see more and more Chapter 9s filed because it's a fresh beginning, they're stronger out of bankruptcy," said Penza. "The Detroit case now brought to light the very real thing that could have happened here in Providence. Who would have thought Detroit could go bankrupt?"
Nationwide, there have been 38 municipal bankruptcy filings nationwide since 2010, according to Governing.com -- and the "majority of filings have not been submitted by bankrupt cities, but rather lesser-known utility authorities and other narrowly-defined special districts throughout the country," bringing the total of general purpose local government bankruptcy filings to 8 (including Central Falls and Detroit). Three of those however, have been dismissed.
Bankruptcy Changing the Equation?
"Prior to Central Falls filing for bankruptcy, retirees there asked to meet with me, because these guys were concerned with what they were hearing. There were rumors their pensions were cut in half," said Penza. "I said look, there's no way that the state will let Central Falls go into bankruptcy. And then we saw what happened."
Penza, however, thought that the bankruptcy served to benefit Central Falls. "I think that decision ultimately helped Central Falls, and had an impact on beneficiaries," said Penza. "It was also an awakening though that it could happen in the case of Providence -- I certainly thought about the impact."
Doughty said that it was precisely impact of a potential bankruptcy that concerned him during negotiations with the city -- and that the recent Detroit decision, which could drastically impact municipal employee pensions there, justified the course of action.
The City of Providence agreement with retirees, fire, and police, which capped all pensions at either 150 percent the state median income or less than the salary of the current employee in the position -- and cut COLAs for ten years -- according to the City saved Providence $18.5 million in FY13 and reduces the City's unfunded pension liability by about $170 million.
"This redeems the position that leadership took -- we didn't know what could happen, so we took hold of our own future," said Doughty. "Some people who opposed it thought bankruptcy couldn't have happened, and we know now it can. I worry because this problem is so wide-spread, and local judges decide it -- it's going to require that they say that yes, pensions can be touched."
Doughty thinks that the changes made through the agreement will help keep the city viable -- and out of any potential bankruptcy scare now, "save for a catastrophic national downturn." However, Doughty saw other Rhode Island municipalities as facing uncertain futures.
"Both Woonsocket and West Warwick are going to have significant trouble over the next year," he said. "If bankruptcy could happen in Detroit, it could happen anywhere."
Taking on OPEBs, Pensions
"The way I looked at it, was we needed to get "x+y" to get to "z" -- meaning the OPEB ARC (annual retired contribution), and pension ARC -- had to get to Z, meaning where it needs to be," said McKee, acknowledging that the town needed to address its "other post-employment benefit" obligations in addition to municipal pensions.
"So it didn't matter to me how to get to Z. In order to keep that equation balanced, if the police wanted something on the pension side, it had to be addressed on the OPEB side, again to get to Z. It was a true negotiation, and we see a path to be successful," he continued.
McKee addressed that the negotiations were "protracted" as the town worked with police. "My thought was to keep the promises made, and reset going forward with the [Cumberland] Police Department, to their credit. They did vote in 26-12 to approve the conditions. You have those pushing back, but it's a strong level of support," noting that the Cumberland Town Council was voting on the proposed changes on Monday.
"On the health insurance, which is two-thirds of the issue we're dealing with in terms of exposure -- we aligned a HSA with a $2K/$4K deductible, which is consistent with what we previously set for fire and municipal workers," said McKee. "We'll reimburse 50% of the deductible for current [police], new officers will be responsible for the 100%."
Among the changes proposed, McKee noted, "The new hires will need to have 25 years of service -- as opposed to 20, and can begin to collect pension at 50. We'll do a career average, as opposed to the current look at just the last years, and there's an increase in their contribution as well."
The changes would make the OPEB -- and pension - ARCS then sustainable for the town, said McKee. "We start at a $2M ARC on pensions, could grow to $3M, and then we'll see a decrease. Similarly, the ARC on health care is $1.5 M then up to $2.5M, and then it drops considerably as well."
Overall, McKee said he thought it was a "give and take" between the negotiating team for the police department. "I've said all along that it's manageable, we're not impacting our retired officers, we're pretty much providing what was agreed," said McKee, who acknowledged that for future hires, "It's a strong reset for new guys."
Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement here.
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
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