Tag Archives: RI

Bankruptcy in Birmingham

Jefferson County, AL has filed for bankruptcy protection, joining the ranks of Vallejo, CA; Central Falls, RI; Boise, ID; and Harrisburg, PA. In this case, the debt that the county used to finance a new sewer system is the main driver of insolvency. The county currently owes about $4.15 billion on the sewer system.

The Associated Press reports:

The problems were years in the making.

Its debt ballooned after a federally mandated sewer project was beset with corruption, court rulings that didn’t go its way and rising interest rates when global markets struggled.

Since 2008, Jefferson County tried to save itself the cost and embarrassment of filing for bankruptcy. But after three years, commissioners voted 4-1 to bring the issue to an end.

“Jefferson County has, in effect, been in bankruptcy for three years,” said Commissioner Jimmie Stephens, who made the motion to file for protection in federal bankruptcy court in northern Alabama.

While the last few years have seen a few cases of municipalities filing for Chapter 9, Jefferson County’s case represents by far the largest. Unlike other recent bankruptcies that were a result of both poor financial management and the economic downturn, Jefferson County’s problems were in part a result of corrupt public officials. Twenty-two people have been convicted for illegally refinancing the sewer bonds to benefit local and Wall Street financiers. Residents in Alabama’s largest county will likely face higher sewer rates as a result.

But the biggest problem for residents when municipalities file for bankruptcy protection is the resulting policy uncertainty. Businesses are typically reluctant, with good reason, to move to a bankrupt municipality. The shadow of Chapter 9 means that for years, residents and businesses will be paying higher taxes in exchange for fewer services because of the remaining debt burden. This will put the county and even the state in a poor competitive standing for new jobs.

In 1994, Orange County, CA, filed for Chapter 9 protection on $1.7 billion in debt, and residents there are still paying taxes toward that debt today. In the short term, Jefferson County will face painful and immediate cuts. The Birmingham Business Journal spoke with Commissioner Jimmie Stephens on what the future holds for the county:

“We’re looking at all of these services that are not mandated by the constitution and, from there, we will begin the reductions and take it as far as we need to, keeping in mind the services that the citizens need,” he said.

 

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.

Harrisburg, PA Bankruptcy Proceedings Continue

On October 11, Harrisburg, PA filed for Chapter 9 bankruptcy, the first state capital to do so in several decades. Now, the city council must develop a plan for the city’s finances going forward. If the state does not approve the council’s plan by November 25th, Harrisburg’s finances could be turned over to a receiver and the city would not have a say in the budget process.

The state is engouraging Harrisburg to pay off its remaining debts primarily by raising property taxes, but the council has been reluctant to raise taxes on its residents, 29% of whom live in poverty. To limit the pain for city residents, Councilman Brad Koplinski supports bankruptcy:

“If the bankruptcy is allowed to proceed, I feel that unfortunately it’s the most beneficial option, because it will allow us to get the city out from under its debt,” Koplinski said at the meeting [held yesterday].

Today, the city’s debt totals about five times its yearly general-fund revenue, and lawmakers have few options to turn to for increased revenues. Vallejo, CA and Central Falls, RI also recently filed for Chapter 9 protection. In both cities, budget problems were driven in large part by increasing unfunded pension liabilities. In Harrisburg, however, the problem developed because the city borrowed $242 million to finance an incinerator that turned out not to be as profitable as expected.

Unfortunately for Harrisburg, even municipal bankruptcy is not a silver bullet for ailing city finances. The Vallejo case illustrates that while bankruptcy gives municipalities some bargaining power for negotiating pensions and can reduce the debt burden, filing for Chapter 9 will not eliminate past obligations. Harrisburg will likely emerge from bankruptcy with a heavy debt burden and nowhere to turn for increased revenue. In this case, bankruptcy may be the city’s best option, but other municipal lawmakers should look to the Vallejo example when promising lavish projects on borrowed money. There is no easy way out of municipal debt.