Providence Rhode Island Faces Bankruptcy
Untenable pension promises made by corrupt politicians to corrupt unions in an unholy alliance is about to sink another city. Please consider Providence is facing bankruptcy
Rhode Island’s capital city will be in bankruptcy by June if it doesn’t get help resolving its financial crisis.
That was the dire warning from Providence Mayor Angel Taveras during a Thursday morning news conference at City Hall. With five months left before the end of the fiscal year and the capital set to run out of cash by the start of summer, the city still faces a $22.5 million deficit in its budget for the current fiscal year, which ends June 30.
The budget shortfall was projected at $110 million last March, when Taveras declared a “category five” financial emergency in Providence. It was reduced after he negotiated new contracts with unions, laid off workers, cut spending and won increased state aid.
“Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe,” the mayor said. “However, not everyone has sacrificed. The failure of our tax-exempts to sacrifice has left a $7.1 million hole in our budget.”
Taveras said the city’s retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city’s pension liability “into the stratosphere” by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said.
“These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars a year,” Taveras said, calling the increases “raises,” not adjustments to keep up with the cost of living. The mayor will hold a meeting with retirees on March 3 where they will be asked for concessions.
Taveras’s office released a list showing that the city’s highest-paid pensioner, former Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin’s pension will total roughly $796,871 if he lives to the age of 100.
Specter of Central Falls
The tiny city of Central Falls became the first Rhode Island municipality ever to file for bankruptcy last August. East Providence’s finances were also placed under formal state oversight in November. Woonsocket and Pawtucket recently disclosed surprise deficits, and two-thirds of local pension plans in the state are “at risk.”
Retired police officers and firefighters in Central Falls recently reached a tentative agreement with former R.I. Supreme Court Justice Robert Flanders, the city’s receiver, that would see their pension payments reduced by as much as 55% if state lawmakers agree to augment that with supplemental payments over the next five years.
Taveras urged Providence’s retirees to learn a lesson from what happened in Central Falls, warning he would find a way to reduce the cost of their pension benefits “one way or another.”
As of June 30, Providence’s city pension system was 32% funded with a shortfall of $901 million, and the city also had a $1.2 billion unfunded liability for retiree health benefits, according to its most recent audit. The entire city budget is roughly $619 million this year.
Unions, Politicians to Blame
Check that out: The entire budget is $619 million, and the city has a shortfall of over $2 billion.
Taveras is barking up the wrong tree arguing “Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe“.
It is the firefighters, police officers, and teachers unions (and of course corrupt politicians willing to buy votes) that are responsible for this mess. The only group that can claim to have sacrificed is non-union taxpayers. However, much of the rest of Taveras’ comments ring true.
This statement says it all “Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin’s pension will total roughly $796,871 if he lives to the age of 100.
To double-check my $796,871 annually claim, I used this Compound Interest Calculator.
At 6% per year, it would take about 24 years to grow to a benefit of $196,813 a year to $796,882.97. Thus I conclude McLaughlin is 76 years old. If he lives another 10 years, his annual pension would be $352,462.11 based on an career ending salary of a mere $63,510.
With this kind of absurdity, it is foolish to attempt to resolve this mess outside of bankruptcy. Those pension contracts should be declared null and void.
I would like to see a bankruptcy judge reduce McLaughlin’s pension to the average of his last 10 years’ salary. Teachers and others on the low end of the benefit scale should be the hit the least. That would be reasonably equitable.
Spare me the sap about legal contacts and promises. Those contracts and pension benefits were bought with bribes and dishonesty with no one looking out for the taxpayer. Fraudulent, self-serving contracts with no one representing the taxpayer should not be legally enforceable (and indeed they weren’t for Central Falls).
More Cities, Major Cities Will Follow
Without even looking at the details, it’s easy to speculate East Providence, Woonsocket, and Pawtucket are going to follow Central Falls and Providence into the bankruptcy gutter.
Moreover, it’s only a matter of time before Oakland, Huston, LA, San Diego, Newark, Cincinnati, etc, go under. Bankruptcy is the only way to wipe out preposterous pension benefits, so expect to see more of them.
As with Detroit, Michigan (see Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What’s Best for Bankrupt Detroit?) bankruptcy would be the best possible outcome for taxpayers.
Bankruptcy is the only way to shed absurd union contracts and pension benefits.
Thus, taxpayers should be rooting for Taveras to ask for concessions so big the unions say “no deal”. It is taxpayers’ best hope of settling the mess in one shot without devastating tax hikes.
Inquiring minds might also be interested in American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution?
About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.