Detroit: Could it happen here in New England?

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July 22, 2013, 7:35 pm
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(NECN: Peter Howe, Central Falls, R.I.) - Before there was Detroit’s landmark municipal bankruptcy filing, there was Central Falls – another city whose economic and population collapse helped drive it to Chapter 9 two years ago.

And the man who ran Central Falls’ bankruptcy reorganization as state-appointed receiver, Providence attorney Robert G. Flanders Jr. of Hinckley, Allen & Snyder LLP, said Monday he also sees another big parallel between the two cities: "Both of them were experiencing problems of underfunding pension obligations to retirees and having generally more government than the taxes and the city residents could afford," Flanders said.

The two cities are starkly different: Central Falls 1.2 square miles home to 19,000 people, Detroit 138 square miles home to over 700,000. And one big difference in how their bankruptcies play out: Before Central Falls filed, Rhode Island enacted a law mandating that bondholders get all their money back. The intent was to avoid wreaking havoc in the Rhode Island municipal finance market and freezing the state’s 38 other cities and towns out of the bond market, which was seen as a likely outcome if the Central Falls filing led to bondholders losing 20 or 40 percent of their investment, making investors skittish about any Rhode Island municipal bond issue.

But as a result, municipal employees had to take cuts of up to 55 percent in their pension benefits.

"It was painful, to be sure," Flanders said. "A lot of people were hurt."

But what happened in Central Falls and in Detroit reflects the reality in all too many cities that, as Jim Stergios, executive director of the free-market-oriented Pioneer Institute for Public Policy Research in Boston said, "We have made a lot of promises we're not going to be able to keep."

Pioneer just developed a new website called masspensions.org where, by crunching data from the state agency that oversees public employee retiree benefit plans, you can see how well funded city, town, pension, and authority pension plans are.

In Detroit, Stergios noted, $2 of every $5 the city spends now goes to retiree pensions – an unsustainably high load that has led to massive cutbacks in basic city services and policing and street maintenance. That was on track to rise to nearly $2 of every $3 by 2017.

The Pioneer website shows that the five worst-off Bay State cities, in terms of under-funding of future pension obligations, are Springfield (which has only 29 percent of its future pension liabilities covered); Everett (38.4 percent); Lawrence (39.4 percent); New Bedford (41.6 percent); and Fitchburg (42 percent).

None of those cities is in anything like the dire straits of Detroit or Central Falls. But, Stergios said, it’s clear that unless their pension obligations are restructured, they will face intense pressure to raise taxes or cut city services to pay municipal retirees.

"We're going to have to pump a lot more money into Springfield's pension system. That is precisely what led to Detroit," Stergios said. "There's not an immediate danger we'll be like Detroit, but there is a long-term problem which could very quickly turn out to look like Detroit."

Other cities that have sought to reorganize their finances under Chapter 9 in the last two years include Harrisburg, Penna.; Jefferson County, Alabama; Boise County, Idaho; and the California cities of Mammoth Lakes, San Bernardino, and Stockton. Pension costs were huge issues in many of those cases, but a Harrisburg trash incinerator and budget-busting sewer upgrade in Jefferson County were the biggest immediate reasons they sought Chapter 9 protection.

For all the economic pain and civic disruption people experienced in Central Falls, the city is now on a path to have a balanced budget for five years and a far more secure future, Flanders said.

For that reason, he thinks Chapter 9 reorganizations to drive critically needed municipal finance restructurings need to be on the table in New England and across the country – and acknowledges that there are strong arguments to be made against the law Rhode Island enacted that spares bondholders their share of the pain of a municipal reorganization and puts most of the sacrifice on city workers.

"The problem with Chapter 9 has always been the stigma associated with it," Flanders said. "I think it's gotten a bum rap. I think it’s actually a helpful process for cities and towns that are insolvent … It's all about how do we adjust the debts in the city and break contracts and restructure obligations in a way that the city can afford. it's an opportunity for the city to push the reset button and go back to square one and get rid of all these crushing debt obligations."
      
With videographer Dan Smith

Tags: Peter Howe, Detroit bankruptcy, Central Falls Rhode Island, Central Falls bankruptcy, municipal bankruptcy filing
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