RI Town Bankrupted by Public Pensions
14 Jul 2011, 12:28 am
From The New York Times
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.
“Time is running out,” warns Robert G. Flanders, the state-appointed receiver, who recently closed the public library and a community center to save money. He has no power to cancel the city’s contracts with workers, so instead he has begun approaching retired police officers and firefighters with what he describes as “the Big Ask”: will they voluntarily accept smaller benefits in the name of saving Central Falls?
Some of the retirees are in their 90s, and Central Falls, like many American cities, has not placed its police and firefighters in Social Security. Many have no other benefits to fall back on.
State lawmakers are trying to contain the damage, mindful that it would be a bad time for any state to seek help in Washington. Last month they rescinded an offer of state aid to Central Falls, just after Moody’s downgraded the city’s credit to “possibility of default.”
But the state still has risks related to the woes of its municipalities, risks that have gone largely unnoticed because it is not as big as, say, Illinois and California. Several other Rhode Island cities are sinking under big debt burdens. Even Providence, the capital, risks running out of cash in September, according to its auditor, and if it scrapes by until October, it must then come up with $60 million for its own municipal pension plan.
Some analysts fear that a Central Falls bankruptcy, and a whiff of other problems out there, could scare nervous investors away from bonds issued by Rhode Island’s other municipalities, perhaps setting off a chain reaction that could push the state itself to the brink. There is a precedent: the last American state to default on its bonds, Arkansas in 1933, got in over its head by trying to help struggling municipalities.
More recently, when local governments have veered toward bankruptcy — Orange County, Calif., in 1994; Cleveland in 1978 — neighboring municipalities have found it harder to sell their own debt. During the New York City fiscal crisis of 1975, New Jersey suddenly found its bonds harder to sell.
“That type of contagion is what you’re trying to avoid,” said James E. Spiotto, a bankruptcy specialist at the law firm Chapman & Cutler, who is not involved in Rhode Island’s problems.
Rhode Island has an investment-grade credit rating, but it is in no position to bail out a string of teetering cities, or take over their shaky local pension funds the way the federal government does when some companies go bankrupt. The state treasurer, Gina M. Raimondo, says Rhode Island must first stabilize its own pension fund, which continues to require more and more cash each year, despite four overhauls since 2005 that were supposed to get the cost under control. The Securities and Exchange Commission is investigating. If the state turns out to have understated its commitments, it could deliver a new jolt to bond markets still nervous after two traumatic years.
Lawmakers in Rhode Island are trying to reassure investors. On July 1 they passed a law giving certain bonds, known as general obligations, legal priority over all other payments that municipalities must make, including retirement benefits. The measure, awaiting Gov. Lincoln Chafee’s signature, also requires Rhode Island’s cities, towns and districts to dedicate their general revenue to paying bondholders first, and to raise property taxes as much as necessary to make all payments to bondholders on time.
It gives less secure types of bonds priority, too, and makes local officials personally liable for any losses they cause by failing to comply with the new requirements.
When the city of Vallejo, Calif., declared bankruptcy in 2008, no one thought it would ripple out over the whole state. Partly that’s because California has shock absorbers: laws on the books that assure bondholders they will be paid and a big, diverse state economy that could bail out a distressed city if need be.
Rhode Island is different. There are only 39 cities and towns in the state, so one troubled city cannot easily fade into the background. And there is not just one troubled city. Recent tests found one in four in some degree of distress.
A startling number have stumbled by trying to operate their own tiny pension funds for selected groups of workers, rather than participating in a state-run pension system for municipalities. There are 36 of these local pension funds, and 23 have been designated at risk, with Central Falls the most endangered. A legislative report found that eliminating all their shortfalls would cost more than the total statewide property tax levy.
In Central Falls, the receiver looked into whether the state-run pension system for municipalities could take over the local plan, but found that a radical restructuring would have to come first.
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 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.
Daniel L. Beardsley Jr., executive director of the Rhode Island League of Cities and Towns, said it was not the city’s idea. Other states limit what can be decided in collective bargaining, but Rhode Island’s law says that for police and firefighters, “wages, hours and any and all terms or conditions of employment” are subject to negotiation.
“That means even the length of a mustache,” said Mr. Beardsley, who over many years has represented Central Falls and other municipalities in contract negotiations. Talks broke down more often than not, he said, and then the same state law called for binding arbitration, which for many years was a clubby process that emphasized comparable benefits all across the state more than any city’s ability to pay.
“It was a domino effect,” he said, leaving Rhode Island with the nation’s highest per capita spending for fire services and sixth-highest for policing. (The binding arbitration law does not apply to public workers other than police officers and firefighters in the state, although some want it extended to teachers.)
Central Falls is already spending about a fourth of its budget on employee benefits, and that will rise sharply when the pension fund is exhausted. Mike Andrews, president of the local firefighters’ union, said about one in four of his men now qualified for retirement, but were afraid to retire, concerned that their pensions would be chopped in bankruptcy.
“We’re always willing to come to the table and try to work something out,” he said. “We want to get this corrected as much as anyone, because if it doesn’t get corrected, we suffer.”
Emphasis is mine
It's a perfect example of what drives me crazy about public sector collective bargaining; it's not anyone involved in the process's personal money on the line, and things like the ability to pay too often are not taken into consideration. Now everyone is screwed, especially the workers who weren't even put into the social security program. Sure, it would be nice to give police and firefighters high pay and gold plated benefits, I don't think anyone really wants to shaft those people, but the money has to come from somewhere, and clearly that was not planned out in this and many other cases.
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- Rick Sanchez
14 Jul 2011, 8:14 am
It's so easy to contractually bind yourself for more than you can afford to pay as long as you believe paying the bill will be someone else's problem.
A pundit commented on similar situations elsewhere. Some ninny caved to union demands for pay and benefits without taking a stand on the fact that there was no way to generate the money to pay for them when they came due. The union people should have known they were never going to get what was in the contract because the money was never there for it. 
14 Jul 2011, 11:21 am
They already are. In this case, these people have pension plans (most government employees do), but these plans promise massive checks that are not funded.
Example....
The typical government pension plan puts X in your account each pay period and guarantees a given rate of return based on years of service and other factors. These funds should be accounted for to fiduciary standards and in investment accounts. Worst thing that could happen is an economic crash that zips out the bulk of the invested funds used to pay the benefits, which SHOULD be unlikely.
What some places have are negotiated benefit plans (typically with unionized workers) where massive benefit schemes were approved, but no way to fund them were provided for. This is a disaster in the making. California's retirement system is much like this. Much of the state budget is going to pay people more each year in retirement than they ever made when working...which is not how a pension normally works.
14 Jul 2011, 1:36 pm
Why would you place blame for this on the bargaining units. They are fulfilling the purpose for which their members have associated together--to negotiate the best deal possible.
Pension shortfalls should never be allowed to arise, because employers, whether private sector or public sector, should always be obliged to ensure that their pension funds are fully funded. But government has continually allowed itself, and the private sector, to evade their pension responsibilities.
First, government allowed itself and private sector businesses contribution holidays, where they were exempted from contributing funds to plans--including the funds withheld as employees' contributions. Then when that reckoning came, someone came up with the concept of "defined contribution" pensions, thereby in one feel swoop transferring 100% of the risk of failure onto workers. It is employers who control pension funds, and employers who make decisions about pension fund investments, but suddenly it is workers, who have no voice in the management of their retirement incomes, who are on the hook if those investment decisions go sour.
My pension entitles me to receive 2% x (years of service up to a maximum of 35) x (mean salary during the best five years) as a retirement income. That is a perfectly reasonable retirement income. My pension plan pays the difference between my Canada Pension Plan benefit (the only fully-funded public pension plan in the G8, by the way). My bargaining unit has not negotiated anything extravagent or unwieldy. The actuarial assumption in the plan is a 4% return on investment, which is conservative and of moderate risk.
What is unreasonable is the expectation that these municipalities could be self-supporting without some degree of aggregation. Why is a community of this size and with this tax base supporting a workforce of 214 police and firefighters? Why didn't all RI municipalities set up a larger public sector pension fund to spread the risk? And why has the RI government permitted its pension funds to remain underfunded for so long?
The mantra of low taxes and no new taxes is all well and good, but we have not acknowledged that there are certain obligations of government that cannot be avoided--one of them is providing for the retirement income of public servants. Investors should be similarly holding corporations' feet to the fire on underfunded pension obligations, but since most fund managers are not interested in anything beyond the next quarter's financial statements, no one takes a long view.
Except, of course, the employees who are going to be relying on these pension funds.
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--James
14 Jul 2011, 1:59 pm
The problem is happening across the rust belt.
The current demographics listed in the article may not have been the historical demographics. If communities grow poorer or smaller, the math changes on what they can support on the current tax base. That's certainly the case in many places.
14 Jul 2011, 2:47 pm
But I am not persuaded that the answer lies in punishing individuals who bargained in good faith for a package of contractual rights that are now being arbitrarily taken away from them because government has failed to exercise the political will to properly fund its activities.
It seems to be an article of faith that "we cannot afford these obligations." But there is also an argument that says, "we are too cheap to pay for the services that we have already received."
Delivery of public services costs money, and government must raise that revenue somehow--largely through taxation. If the legislature has decided that every municipality shall provide police and fire protection, then the pensions for police officers and firefighters are part of that mandate--and government should not seek to shirk the costs of fulfilling that mandate now when the bill has come due.
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--James
14 Jul 2011, 3:10 pm
Some municipalities are prohibited from raising taxes further. And in other cases it would just accelerate flight of the tax base. It's probably a death spiral unless restructuring occurs. Or they might hang on and wait for the previously negotiated pension base to drop dead.
I think it's similar to a swarm of locust. People move to an area, build up generational obligations and debts and then the young and able move on when the ratio of debt to services becomes unfavorable. In 30-40 years you'll have a similar situation in the SW. Once the local boom/bust cycle hits some inflection point, Americans will flood the next low obligation destinations (kansas? Idaho?). Leaving a glut of retired cops and teachers in the SW wondering why their pensions are threatened by a missing tax base.
14 Jul 2011, 4:37 pm
That may be a reason, but it is not an excuse. Restrictions on taxing authority are good politics, but run headlong into unfunded mandates.
You cannot have police, fire protection, schools, roads, bridges, and the host of other programs and services that people expect of government unless you are prepared to pay for them. And government that attempts to continue providing these services by shorting its future obligations is the author of its own misfortune.
Which is precisely the argument for aggregation, and equalization.
If a senior level of government mandates a public service, it is incumbent on that government to provide transfers to ensure that each subordinate jursidiction has the fiscal capacity to deliver that mandate.
In Canada we have "have" provinces and we have "have not" provinces. The federal government provides fiscal transfers to the provinces for things like health and higher education (which are areas of provincial jurisidiction, but in which Canada provides the bulk of funding). These transfers are adjusted through equalization formulas to ensure that a Canadian in Nova Scotia is able to receive essentially the same level of services as a Canadian in British Columbia.
Albertans, in particular, are notorious squawkers when they see public revenues collected from Alberta diverted to pay for services in other provinces. But at some point we have to recognize that this is one country, and the mobility rights guaranteed in the Charter are going to impose a level of parity whether we like it or not. The same holds true in the United States.
Far better that parity is managed and predictable.
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--James
15 Jul 2011, 7:02 am
Pension shortfalls should never be allowed to arise, because employers, whether private sector or public sector, should always be obliged to ensure that their pension funds are fully funded. But government has continually allowed itself, and the private sector, to evade their pension responsibilities.
The error in your reasoning is that the unions/workers do not bargain in good faith.
This isn't happening everywhere, but where it happens, you find the unions act with a considerable amount of "thuggery" and the members don't care how it is done, so long as they get what they want. When a company, city, etc. can be paralyzed with labor strikes, they are pressured to make deals. Sometimes bad deals are made. Many unions might be reasonable and accept that the company/city doesn't have the means to provide X as a benefit. Others are unreasonable, and if you dig about, you'll find the horror stories. There are reasons why factories shut down and move to "right to work" states or just out of the USA altogether. Governments don't have the same option.
When these pension guarantees were made, the odds are the negotiators for the city caved to the union's unreasonable demands. Why? I can't say without knowing the case-specific details. Maybe they thought it would be no deal to pay for it all. Certainly, much of the USA was under an economic delusion that things would keep getting better (e.g., housing bubble).
However, IT IS THE DUTY of a negotiator to KNOW BOTH SIDES of the bargaining table. A union negotiator should have known what a municipality/state could or could not reasonably afford and be willing to work within those confines. There are times, as I pointed out, where the union does not care. They want X, and by God they will have X or they will go on strike. That's not bargaining in good faith. The state/municipality is not able to just go out and hold a referendum vote saying, "The union workers want X, to do so, we must be approved to raise property taxes by Y%. Do you approve?" So, I can see an agreement being made with the negotiator leaving "how do we pay for this" to someone else to solve.
So, yeah, the city/state has responsibilities, but the union workers are just as much to blame for demanding things that were unsustainable.
A contract doesn't mean jack crap if there's no money to honor it. Go to court against someone with nothing to take and you're throwing good money after bad.
15 Jul 2011, 11:31 am
This isn't happening everywhere, but where it happens, you find the unions act with a considerable amount of "thuggery" and the members don't care how it is done, so long as they get what they want. When a company, city, etc. can be paralyzed with labor strikes, they are pressured to make deals. Sometimes bad deals are made. Many unions might be reasonable and accept that the company/city doesn't have the means to provide X as a benefit. Others are unreasonable, and if you dig about, you'll find the horror stories. There are reasons why factories shut down and move to "right to work" states or just out of the USA altogether. Governments don't have the same option.
You have a very peculiar conception of "bargaining in good faith." Have unions ever been unclear about their demands? If there is bargaining in bad faith going on, it is on the part of employers who agree to collective agreements with no intention of fulfilling their obligations under those agreements.
Bad faith negotiation does not include using the tools at your disposal to put pressure on the other side. Employers use lockouts, and lobby government for back to work legislation as a counter attack to union's collective activity. None of this is bad faith negotiation--it is the transparent exercise of force to compel the other side. It's a dirty business, but everyone knows what the other side is up to.
Bad faith negotiation is the use of "bait-and-switch" offers. Bad faith is putting offers on the table which you have no intention of signing. Bad faith is wasting the other party's time at the negotiation table when you know that negotiation mandate provides you with no room to make concessions.
You can complain loud and long that these were bad deals. But you know full well that the law will not look into the value of consideration. The deal was made, and the employer is bound by the deal. It seems to me that you are perfectly happy with the freedom to contract, except where you believe yourself to be on the wrong end of a bad deal.
What happened to the rule of law? Is it fair that a company or a government is allowed to take unilateral action to strike away that which has been bargained for? Is it fair that someone has worked for an employer for 35 years, and dutifully paid into the employer's pension plan, only to have the benefits of that plan reduced or even reneged altogether?
It is shameful.
It is the duty of a negotiator to fulfil the mandate provided by the principal. The public service side of my career is involved with the negotiation of self-government agreements with First Nations. I am a negotiator. It is not my job to make the First Nations' deal for them. It is my job to be an interlocutor--to represent the interests of the First Nations to my principals. But when Cabinet gives our negotiating team a mandate, that is the scope within which we have to work to find a deal. As agents of our principal we have absolutely no authority to exceed our mandate.
Indeed, if we sought to do so, that would be a case of negotiating in bad faith.
A contract doesn't mean jack crap if there's no money to honor it. Go to court against someone with nothing to take and you're throwing good money after bad.
You are labouring under the misapprehension that these governments are insolvent because their liabilities exceed their assets. I am prepared to wager that they are insolvent because their current liabilities exceed their cash. Businesses don't go bankrupt because they make losses--they go bankrupt because they run out of cash. Period.
I think that you will find that if a municipal or state government was placed in bankruptcy there would be some pretty deep pockets of assets to attach, and wages, benefits and pension obligations rank ahead of every other creditor except for taxes.
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--James
15 Jul 2011, 2:03 pm
This isn't happening everywhere, but where it happens, you find the unions act with a considerable amount of "thuggery" and the members don't care how it is done, so long as they get what they want. When a company, city, etc. can be paralyzed with labor strikes, they are pressured to make deals. Sometimes bad deals are made. Many unions might be reasonable and accept that the company/city doesn't have the means to provide X as a benefit. Others are unreasonable, and if you dig about, you'll find the horror stories. There are reasons why factories shut down and move to "right to work" states or just out of the USA altogether. Governments don't have the same option.
Police and fire-fighters are forbidden from striking. The issue is the state can't renege on a contract just because there is an economic downturn and revenues have fallen.
15 Jul 2011, 9:30 pm
So do employers bargain in good faith, going out of their way to determine the precise "marginal product" of their employees so as to give them the best wage? No. Then it's pretty f*cking moronic to demand that unions do something corporate employers don't - try to be a "nice guy" in bargaining.
Last edited by Master_Pedant on 15 Jul 2011, 9:38 pm, edited 1 time in total.
15 Jul 2011, 9:37 pm
The US was just hit by the hardest recession imaginable, of course tax revenues and hence state and local budgets are going to suffer, besides its been well known that delusional pricks at the federal level have been transfering responsbilities without funds to state and local gov't as part of a moronic attempt to "shrink (federal) government" for years. Public sector workers have such great benefits (well, not compared to your average CEO, but compared to an average middle class worker) and security because the pay is low compared to private sector jobs requiring a similar level of education.
