Tag Archives: Rhode Island

Central Falls Receiver: Bankruptcy can be a good thing

Central Falls, Rhode Island receiver Robert Flanders addressed the Rhode Island Statewide Coalition this weekend and took the opportunity to praise the process of bankruptcy for municipalities in deep distress. Reports The Pawtucket Times, “It’s not a horrible thing, it’s a thing we ought to be doing,” From his view bankruptcy allows a municipal government to make the necessary change to come back stronger. The stigma attached to bankruptcy he argues is short-lived. Another lesson offered: Rhode Islands small governments have built up expensive debts in the form of promises to public sector workers and it might be worth school districts and municipalities merging administrative expenses.

The core problem in cash-strapped, economically struggling Rhode Island towns is how to pay for the increasing costs for government without putting even more pressure on residents and businesses.

Richard Brodsky, who is currently on a board advising Yonkers, NY as the city tries to bridge a massive budget gap, writes at The Huffington Post, that the problems afflicting many municipal governments can be traced to budget gimmicks and attempts to “kick the can down the road,” noting that blame tends to be shifted to overly-generous employee pensions.

I tend to agree. Pension and health care costs are driving many (but not all) municipal fiscal crises. Years of misleading accounting gave all parties a false sense of fiscal security. This has led to benefit enhancements negotiated by unions and politicians, governments skipping payments, and excessive risk-taking with plan assets. There is plenty of blame to go around.

How to fix it? Begin with accurate numbers. Recently Mayors and executives from across New York State met in Albany to discuss the unforgiving and unavoidable math behind rising pension costs, with the Mayor of White Plains noting, “The road to hell is paved in amortizing pensions,”

New Medicaid Case Study Highlights the Role of Politics in Policy

Last week, Scott Beaulier and Brandon Pizzola released new research on Medicaid, conducting case studies of five states that have implemented reform measures designed to control program costs. They find that the political climate is essential to the success of reforms.

Medicaid is a cost driver in state budgets for several reasons, but an important factor is that most states have designed the program so that a formula determines the amount of federal money they receive based on state-level Medicaid spending. Reforms which move to essentially a block grant program, as implemented in Rhode Island and Washington, have so far successfully reduced Medicaid spending by eliminating this incentive. These two states have moved to a system where the federal government pledges a fixed yearly amount toward their Medicaid spending. If the full amount is not spent, the remainder can be transferred to the general fund. This reverses the incentive from spending as much as possible to searching for cost savings. Both states have also introduced measures of individual patient responsibility, requiring, for example, that Medicaid recipients do not rely on emergency rooms for routine care. While it is too soon to tell if Rhode Island and Washington will manage to control costs in the long run, both states appear to have achieved improved incentive structures for doing so.

These states passed reform bills not by making a gradual transition to new policies, but by moving decisively. In contrast, Florida lawmakers attempted to test reforms in two counties before expanding them to apply to the rest of the state. This time lag served as an opportunity for interest groups to block further changes. Rhode Island and Washington developed support from these interest groups by framing the issue as the state against the federal government rather than one of winners and losers within the state. In Tennessee reform has not been successful because key interest groups like the Tennessee Medical Association did not get behind proposed reforms, making them unworkable in practice.

Despite the apparent successes in Rhode Island and Washington, the federalism research that Ben and Eileen explored last week reveals that block grants are not a panacea. Block grants, like all intergovernmental spending, carry with them fiscal illusion. This obfuscates program costs to taxpayers by spreading the funding across multiple layers of government. While moving from a matching funds formula to a block grant is an improvement in transparency, total spending is still obscured. Furthermore, while neither state has failed to keep spending within the the budgeted block grant so far, it’s hardly inconceivable that program costs will outpace grants at some point, leading states to seek bailouts after implementing reforms.

The demonstrated reasons to be pessimistic about the viability of programs whose costs are shared across state and federal governments leave reason to question whether or not block grants are successful tools for curbing costs in the long run. However, Rhode Island and Washington have chosen a path that is at least more sustainable than other states, which face incentives to increase Medicaid spending with no limit in sight.

Pension Hearings Wrapped up in Rhode Island

The Rhode Island legislature completed hearings on Tuesday on the reform bill proposed by Governor Chafee and Treasurer Raimondo. The proposed reforms, many explained here, include:

  • Freezing COLA increases in benefits for retirees for up to 19 years;
  • Creating hybrid plans for current and future employees with a defined contribution portion, similar to a 401(k) and a smaller, defined benefit portion;
  • Raising the retirement age from 62 to the age when individuals begin receiving social security;
  • Amortizing the remaining defined benefit plan over 20 years.
Now, lawmakers are debating potential amendments to the reform bill, and it could be weeks until they vote on a final version. Among union leaders, eliminating the COLA is understandably one of the most unpopular parts of the bill because it significantly reduces the amount of money retirees will receive over the the course of their retirement. However, this part of the bill is key in saving RI taxpayers about $3 billion and ensuring that the pension fund will remain solvent.
State union leaders suggest that instead of the reforms proposed by the state’s democratic administration, Treasurer Raimondo should adjust the fund’s actuarial assumptions. They support changing the fund’s expected growth rate from 7.5% to 7.75% and adjusting the assumed average life expectancy for retirees. Their resistance to more significant reform is surprising, given the dire consequences that union members suffered in Central Falls, RI. There, the local pension fund became insolvent, leading the municipality to bankruptcy. Now, many Central Falls pensioners are receiving less than half of the benefit that they were promised.
The fate of this bill in Rhode Island is important not only for local employees and taxpayers, but for troubled pension funds across the country. If Rhode Island is able to enact reforms that protect retirement benefits and taxpayers, it will serve as a model for other states.

Tightening Municipal Bankruptcy Laws

There have been 629 municipal bankruptcies in the US since 1937. Some of the most recent include: Vallejo California, Central Falls Rhode Island, Boise County Idaho, and as of last week, Harrisburg Pennsylvania.

As a result of these recent filings, municipal bankruptcy, or Chapter 9 of the U.S. Bankruptcy Code, has become an increasingly important topic in the policy community and a few states have taken action towards tightening up and/or clarifying their municipal bankruptcy laws.

Rhode Island passed legislation earlier this year that:

takes the decision to file for receivership out of the hands of the community and gives it to the state Department of Revenue. It also replaces the existing state budget review commission system, set up in the 1990s, with a new three-step process of increasing oversight

Just last week, California Governor Jerry Brown signed legislation that changes how cities file for bankruptcy:

After the law takes effect in 90 days, municipalities in the most-populous state will have to submit to a neutral review of their finances, or demonstrate a fiscal emergency, before seeking Chapter 9 bankruptcy protection in federal court.

Given that future municipal bankruptcies are imminent, legislative actions aimed at tightening up and clarifying the current bankruptcy laws may be beneficial. However, Chapter 9 should not be seen as the solution or as an easy way out of a tough situation. As Michael Viscount and Josh Klein rightly argue:

Chapter 9 is a tool for a municipality to restructure its finances in an orderly fashion — but it is not a substitute for political will, which is required to tackle the difficult fiscal problems surrounding us…. Municipal bankruptcy will not eliminate any of the hard choices that must be made to restructure governmental obligations successfully.

Waiting until a municipality is on the brink of bankruptcy is fiscally irresponsible. Politicians and policy makers need to stop waiting until it is too late and begin taking the necessary steps towards creating policy environments that promote fiscal stability.

 

 

 

Providence, R.I. bond deal: capital improvement or budget tactic?

Issuing municipal bonds for capital improvements of government buildings may seem like a routine use of debt. However, as Michael Corkery of The Wall Street Journal reports, sometimes the proceeds are used for very different purposes. Providence, Rhode Island issued a $35 million “green monetization”bond, $30 million of which was used to balance the city’s budget. The remaining $5 million was spent on upgrades to Providence City Hall and the Department of Public Works. The city needed and received state permission to issue the bond. Revenue director, Rosemary Gallogly, warned Providence officials that this green project was not so much a capital improvement deal as it was a clear case of deficit financing. They city got a pass because of other measures they had taken to balance their budget.

Other cities have recently done the same. Newark, N.J. Faced with a large deficit the city had to decide among service cuts, property tax hikes, or issuing debt. Newark pursued a 20 year lease-back of 16 city properties including the Courthouse, police and fire headquarters and Newark Symphony Hall. The deal means the city gave control of the buildings to Essex County Improvement Authority, which then issued a $73 million bond for improvements. Of that total, $40 million went to Newark’s general fund, $22 million went to building upgrades, and $11 million to paying down existing debt.

The cities are upfront about their “green monetization” intentions: balance city budgets while avoiding tax hikes. At least for now as a bond is taxation deferred.

 

Is Fiscal Illusion a factor Central Falls’ bankruptcy?

Central Falls, Rhode Island has been at the brink before. In 1991, the state took over its schools. John Hill writing at Providence Journal reports this move may have set up a fiscal dynamic responsible for the current municipal pension crisis. Central Falls was given a chance to avoid property tax increases for 10 years by relying on state funding for schools. The result is that Central Falls got used to not raising property taxes and not putting money into its pension plan.

In 1991, state aid accounted for 19 percent of Central Falls’ revenues. By 2008, state aid was 31 percent of revenues. When aid was reduced after the recession started, Central Falls finances experienced a shock. Over the same period, other Rhode Island towns increased their property tax levy by 133 percent, Central Falls only increased its levy by 23 percent. As Projo.com reports, if Central Falls instead raised property taxes by 2 percent a year over the period and contributed $200,000 a year to the pension system,  it could have avoided the 50 percent cut in benefits proposed by State Appointed Receiver, Robert Flanders.

What this 20 year policy of growing dependency on state aid and decreased reliance on property taxes points to is the fiscal illusion that operated in Central Falls’ finances. That is, when the source of taxation and of spending are not fully observed (or obviously linked) spending may be perceived as less costly than it actually is.

Another public choice lesson in the article is the incentive of politicians to obscure the real cost of spending:

“Though they say Schaefer’s numbers and reasoning on tax increases are right, two members of the 1991 commission said it was unrealistic to expect politicians up for reelection every two years to raise taxes when state aid increases were covering increases in annual operating costs. “Unfortunately, the reality is that in the political structure of any town, there just isn’t anyone who has the discipline to do that,” said Francis Dietz, president of Memorial Hospital and a 1991 commission member. “I think Frank is right in that assumption,” Varin said. “That’s not just a hard sell; it’s a practical impossibility.”

Rhode Island’s plethora of pensions

The Providence Journal has a database of Rhode Island’s 150 pension plans. Most of these plans are part of Rhode Island’s state plans which cover local employees. In addition there are about two dozen locally-operated plans. Rhode Island’s state operated plan faces an unfunded liability of $6.8 billion (using a discount rate of 7.5%) or 45 percent funded. State Treasurer Gina Raimondo is proposing some significant reforms including moving to a hybrid defined contribution/defined benefit system. Her report, “Truth in Numbers”, puts the blame for large unfunded liabilities on unrealistic accounting.

One proposal the state is considering is setting up a fund – named MAST or the Municipal Accountability Stability and Transparency Fund – to encourage local governments to more accurately account for their pensions and OPEB liabilities and make their full annual pension contribution in order to receive additional state aid. Moody’s likes the plan.

The good news here is that Treasurer Raimondo has properly diagnosed the core problem: faulty accounting assumptions. While she stops short of endorsing the risk-free discount rate and provides an alternative estimate of liabilities based on the corporate bond rate she surmises the problem correctly. What languishing towns must consider is that their pension problems took decades to build by reference to inaccurate numbers. The strategy laid out here is a good one: first accurately calculate the bill and then proceed with structural reforms.