Tag Archives: Robert Flanders

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,”

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.”