In October Central Falls, Rhode Island’s pension system will run dry. It’s the second town in the U.S. to face this scenario since Prichard, Alabama. The small town has a $80 million pension bill. Currently payouts represent one-quarter of the town’s budget. That will increase quickly once the fund runs out. As The New York Times reports Rhode Island’s municipal bankruptcy/pension dilemmas is unique. Rhode Island is a small state with 39 small municipalities.
Thirty-six of these cities operate their own pension funds and 23 of these are considered “in distress.” The question now is: what is Rhode Island’s responsibility should these cities ask the state for help? Some place the blame on Rhode Island’s collective bargaining laws – set in state statute- that put everything on the table for negotiation. But then there is the problem of the pension plan itself, instituted by the local government in 1972. Consider also the role that accounting standards have played in underestimating liabilities. To date, Rhode Island has taken measures to reassure bondholders giving GO bonds priority over other forms of debt.
It is unclear how this will play out and the extent to which Central Falls’ deep fiscal problems could trigger problems throughout the state. In addition to multiple independent local plans. The state operates its own Municipal Employee Retirement System in which several towns participate. The state-run plan is less than 36 percent funded with an unfunded liability of over $12 billion.