Central Falls, in Rhode Island, is close to emerging from bankruptcy with a plan that hammers its retired municipal employees but leaves bondholders unscathed, in a contrast with other recent U.S. municipal bankruptcies.Problems of Central Falls are playing out throughout Rhode Island towns despite state reform:
On Thursday, a state-appointed receiver overseeing the finances of the tiny, impoverished city is expected to win court approval for a plan that rescues Central Falls from financial collapse and should balance its budget for at least the next five years.
Unlike the approach of some other U.S. states such as California, which left struggling cities to try to fix their finances on their own, the plan for Central Falls reassured the credit markets, but scarred the city.
The smallest city in Rhode Island and the only one ever to file for bankruptcy will emerge with powerless elected officials, property owners facing tax hikes every year and retired public employees irate about having their pensions slashed.
"We understand how truly burdensome these cuts are," said Ted Orson, the attorney for Central Falls' receiver. "But they were the only way for us to do what we were on the way to doing, which is coming out of bankruptcy with a city that is now functional."
The city never missed a payment on its $19 million of currently outstanding general obligation bonds, but that is of little comfort to those who are bearing the cost of the rescue.
"We've been pilfered and beaten down," said Bruce Ogni, president of the Central Falls police retirees organization. "We didn't have the power, the money, to fight it."
The cuts drove home the message to public sector pensioners in other Rhode Island cities that if they didn't agree to renegotiate their retirement benefits, they could be facing even steeper cuts if their city goes bankrupt. In Providence, the state capital, retirees agreed this June to major changes to help the city avert bankruptcy.
BORROWING ABILITY PRESERVED
Central Falls is a city of about 19,400 people, 60 percent of them Latino, crammed into 1.2 square miles. Over time, as elsewhere in Rhode Island, it lost its textile mills and factories. A quarter of its residents live below the poverty line - twice as many as the state average - and the median household income is just under $34,400.
In some places, grass pushes through cracks in sidewalks in front of boarded up triple-decker, multi-family homes. Elsewhere, stately churches and tidy bungalows anchor neat streets.
In the spring of 2010, Central Falls was facing insolvency due to steep cuts in state aid, revenue shortfalls - and an unfunded liability of about $80 million for pension and retiree health benefits. The city had revenue collections of about $16 million but expenses topped $21 million.
That May, the city asked to be put into judicial receivership, and the municipal bond market and credit rating agencies bristled.
In response, state lawmakers quickly passed two different laws that preserved Central Falls' ability to continue borrowing, as well as the state's reputation in credit markets.
One law protected bondholders, giving them a lien on property tax revenue. The other established a three-tier system - a fiscal overseer, a budget commission and a receivership - for the state to intervene in financially distressed cities.
"Access to the credit markets ... is extremely important, and given the size of Rhode Island, we did not want Central Falls to have some kind of contagion impact on our other communities," said Rosemary Booth Gallogly, director of the Rhode Island Department of Revenue, who orchestrates the state's oversight of distressed municipalities.
The way Rhode Island stepped in "reflects positively" on the state and its municipalities' creditworthiness, said Alan Schankel, who runs municipal bond research for Philadelphia-based Janney Montgomery Scott.
Janney holds some Rhode Island bonds and has provided financing for both stable and struggling local municipalities there, Schankel said.
In California, it took three years and about $10 million in legal fees to get the city of Vallejo out of bankruptcy in August 2011. This summer saw two other major municipal bankruptcies there, Stockton and San Bernardino, where bondholders could take haircuts.
Both California and Rhode Island have among the widest yield spreads on 10-year, top-rated municipal bonds, according to Municipal Market Data, a unit of Thomson Reuters. But California, one of the largest borrowers on the U.S. municipal bond market, has a yearly average of around 87 basis points, well above the 54 basis point of Rhode Island.
SMALLER WORKFORCE, PENSIONS SLASHED
Mayor Charles Moreau started cutting the city's workforce after asking for a judicial receiver in May 2010. City employees now total 116, down from 174.
The city's only community center was shut, cutting 32 positions. The library was also closed, reopening later under nonprofit management.
While positions were cut, base salaries rose. On average, city employees made $41,650 annually before the bankruptcy. Today, Central Falls employees earn an average base salary of $47,500. And they'll get annual 2.5 percent raises for at least the next five years, said Gayle Corrigan, the receiver's chief of staff.
The city's 133 retirees had their pensions cut by up to 55 percent, with pensioners now getting an average of $16,626 a year. The state allocated $2.6 million to soften the blow for the next five years.
SOME STILL STUNG
Central Falls' bankruptcy left its elected officials powerless. Even in January when state officials think they can hand the reins back to city council members and the mayor, the bankruptcy case will continue in court and the state will retain oversight, allowing it to step back in if local elected officials veer from the five-year budget plan.
"I don't know how much they're going to let us do," said city council president William Benson Jr. "We just have no authority and no power."
The city council is still embroiled in a legal battle against the state for taking over. The mayor did not return a call seeking comment, and no one answered the door at his home last week.
Local taxpayers will foot the bill for the fees and costs for the receivership and bankruptcy, which will top $3 million. Included in that figure is $97,000 associated with the cost of drafting the state legislation, and the cost of the receivership.
NOT OUT OF THE WOODS
Several Central Falls' residents said they haven't noticed much difference because of the bankruptcy.
Rafael Brandon, 41, said firefighters responded immediately when his family's home caught fire in July. "They're pretty good. When you call them, they show up quickly," he said, adding that police are equally responsive.
But Benson, from the city council, said that Central Falls is not really out of the woods.
The city's total gross assessed property value dropped to about $524 million from nearly $804 million between fiscal years 2010 and 2011. Even so, with the annual 4 percent property tax hikes through 2017, Central Falls expects its revenue collections to grow from $16.6 million in fiscal 2013 to $19.8 million in 2017.
Thomas E. Cawley Jr., 85, and his wife Bernadette will be paying those increased property taxes on the home in which they've lived for 55 years.
Cawley was a Central Falls police officer for 26 years, retiring as a sergeant in 1986, the same year Rolling Stone magazine labeled the city the biggest cocaine hub in the Northeast.
At his dining room table, Cawley gazes through thick glasses at a pile of letters. One, from September 2011, informed him that after making payments for a $20,000 life insurance policy for 24 years, his policy had been canceled as part of the city's austerity plan.
Cawley's annual pension payment was slashed to $18,274 from $27,073 and his health insurance was moved to Medicare from Blue Cross at a cost to him of $100 a month.
He, like other Central Falls employees, gets no Social Security benefits from his city job, though he receives about $6,000 a year in Social Security payments from old part-time jobs.
He and his wife are angry, but the retirees didn't have the money or power to fight it, they said. "We have to live on what we're getting," he said. "What else can you do?"
Last year, Rhode Island enacted what experts said was the most far-reaching, sophisticated public pension reform in the country to date, becoming a model for other states and cities seeking to reshape their own ballooning pension systems.
Yet the smallest state in the United States can't say it has won the fight: the reform didn't apply to dozens of independent local pension plans, many of which are sorely underfunded and are stuck fending mostly for themselves.
Whether towns have acted urgently on pension reform, however, is another matter.
At a heated town council meeting in West Warwick in June, the biggest item on the agenda was a long-running squabble with the school board about whether to hand over a few million dollars to spare cuts in sports and music programs.
Sean Henseler, a parent and coach, was trying to get the message out that the real demon on the fiscal horizon was the town's nearly $235 million of unfunded liabilities for pension and other retirement benefits.
"That's the iceberg they've already hit. The Titanic is going down," Henseler said after the meeting. "These guys are paying lawyers to rearrange the deck chairs."
Debate about public pensions is playing out across the United States as state and local governments - many of which already are struggling under bare-bones budgets in the post-recession era - face retirement systems that are increasingly burdensome or even unsustainable.
The overhauls, which could reshape municipal governments for years to come, are fractured in a nation with thousands of funds and a jumble of different laws at play.
Rhode Island is not the only state that has a raft of independent local pension plans.
Pennsylvania, for example, has about 3,200 totally independent local pension plans, a quarter of all public pension plans in the country.
"These smaller local plans tend to be less efficient and cost more and tend to have less oversight than the larger statewide plans," said Keith Brainard, research director for the National Association of State Retirement Administrators.
"And when you've got individual small employers trying to navigate investment markets and taking on all of the actuarial risk on their own, they're likely to experience higher costs, lower returns and higher volatility," he said.
Reform in Rhode Island, which took effect July 1, suspended cost-of-living adjustments, raised the retirement age, and moved state employees onto a hybrid pension plan of defined benefits and mandatory defined contributions.
The state has four main pension funds covering about 66,000 teachers, judges, police and other state workers.
RHODE ISLAND LOCAL PENSIONS UNDER THE GUN
Rhode Island also has 36 separate local pension plans administered by 24 municipalities for firefighters, police and city employees. More than a dozen were funded at less than 34 percent in fiscal 2010.
Last September, the state's auditor general, Dennis Hoyle, reported that locally administered pension plans were collectively $2.1 billion short in fiscal year 2010, the most current data available for all the plans.
That amounts to a liability of $144,000 for each of the 14,600 members of the pension plan, according to the U.S. Census Bureau.
The average funded ratio of local plans was 40.3 percent. Funding for other locally administered post-employment benefits, mostly for healthcare, was an additional $3.5 billion short of the mark.
Fixing the problem may be tough going for cities and towns, which have suffered cuts in state aid and lowered revenue.
In nine towns, pensions and other retirement benefit obligations - if paid in full - would have consumed at least 25 percent of their property tax levy in fiscal 2010. In Woonsocket, the liabilities would have eaten up 61 percent.
State budget commissions are already overseeing finances of Woonsocket and East Providence. West Warwick is one of three other communities that have qualified but have yet to ask for a budget commission. Central Falls went bankrupt last year - in large part because of unmanageable bills for its nearly insolvent pension plans.
"This is a crisis that's coming," Governor Lincoln Chafee told Reuters recently. "There's going to be state intervention."
The changes from last year's state pension reform - which labor unions are challenging in a lawsuit - did provide some help for towns and cities, since they pay into the state pension fund for teachers.
State Treasurer Gina Raimondo, a former venture capitalist who took office in January 2011, said the reform could save Rhode Island's cities and towns about $100 million in this fiscal year and $1 billion over the next 20 years.
"If we hadn't had the reform, the bill to the taxpayer beginning fiscal year 2013 would have been almost double," Raimondo told Reuters.
SOME CITIES TAKE A CRACK AT REFORM
Facing the possibility it could run out of money, Providence, the state's biggest city and the capital, enacted pension reforms that freeze cost-of-living increases for 10 years.
West Warwick is among cities that are just beginning to address the problem of underfunded pensions.
"The problems go back 10 years. The current town council is the first in some time that's actually tried to make contributions," said Zak Asatrian, West Warwick's pension board chairman.
For nine of the past 13 years, the town of about 29,0000 paid less than 50 percent of what it owed, according to data presented by state officials at a May public hearing. If nothing changes, the fund will run dry by fiscal year 2017, they said.
West Warwick is making efforts to cut costs. It has privatized trash collection and is bargaining with unions for concessions.
But spending plans die hard. A week after the raucous public meeting, attended by nearly a thousand people, town council members restored about $4 million it planned to cut from the schools.
The city will also pay $5 million toward its pension plan in fiscal year 2013 - five times more than last year, but still just about half of the required contribution.
"We could level this thing off and stop the bleeding in 2013, but we have a long way to go," he said.
The articles highlight the ongoing problems at thousands of local pension plans, many of which are sorely underfunded and completely mismanaged.
All over the United States, pension reforms are fast becoming the hot button issue of the day. Bloomberg reports that California debt is beating Illinois bonds by the most in three months as investors choosing between the two lowest-rated states reward efforts to bolster the finances of the nation’s biggest pension.
In Texas, public pensions are warning on steps on funding gaps taken by others:
Texas public pensions said moving away from traditional defined-benefit plans wouldn’t shrink their unfunded liabilities, in contrast to money-saving steps to end lifetime guarantees by states from Rhode Island to Kansas.
The state’s $110.3 billion Teacher Retirement System released a study saying that switching to a 401(k)-style defined-savings plan may cut payments to retirees. The fifth- largest U.S. public pension by assets said Aug. 31 that the change also would widen a $24 billion gap between promised benefits and projected assets to $36 billion.
The teacher plan’s report and a second study issued yesterday by the $22.1 billion Employee Retirement System of Texas contrast with projected savings and unfunded liability cuts for pensions in Rhode Island, Kansas and Louisiana, which made such changes. All three place in the top 10 among states with the highest gaps between assets and future obligations, according to a Bloomberg Rankings study of 2010 data.
“There’s a lot of visibility on this issue nationally, and there’s a push for change in Texas,” said state Representative Vicki Truitt, a Southlake Republican who leads the House Pensions and Investments Committee. The reports set the stage for a debate by Lone Star State legislators next year.
“This is going to be a hot issue” when lawmakers convene in January, Truitt said. Her panel will take up the reports Sept. 12.
The Legislature in the second-biggest U.S. state by population ordered the pensions to study alternative ways to meet their obligations. Moving away from the current system, which guarantees retirees set monthly payments for life, would be the biggest change in the two plans, which cover 1.5 million beneficiaries combined.
Rhode Island, seen as one model for taking steps to lower costs, last year mandated a 401(k)-style plan for newly hired workers and suspended cost-of-living increases for current retirees, moves projected to help save about $3 billion a year. Kansas adopted a similar approach, mandating cash-balance plans for workers hired after December 2014, according to the National Conference of State Legislatures.
Louisiana will switch all employees to defined-savings plans, the group said. New York will offer a defined-savings program to nonunion workers who earn at least $75,000.
Retiree benefits “are really a form of deferred compensation that shift the risk from workers to the taxpayers, and as we’ve seen with pension systems across the country, sometimes taxpayers end up with a pretty steep bill,” said Chuck DeVore, a spokesman for the Texas Public Policy Foundation, a research and lobbying group in Austin.
Defined-savings plans such as 401(k) programs are among changes in public pensions advocated by DeVore’s group. It has suggested the switch for new employees and those not yet vested for retirement benefits.
The report from the teacher fund said such a change would cut payments to retirees while widening its unfunded liabilities. Closing the defined-benefit plan to recently hired workers would reduce contributions, curbing the growth in assets that generate investment returns to help cover commitments, the report said.
The Employee Retirement System’s study said its $5 billion unfunded obligation would climb to $12.8 billion within 10 years if no changes are made. It has 83 percent of the assets needed to cover future benefits, as does the teacher plan. Actuaries generally consider 80 percent funding levels to be healthy, the Pew Center on the States said in a June report.
States face a $1.4 trillion gap between promised pension and retiree health-care benefits and projected assets, Pew said. Studies using different methods and assumptions for investment returns have projected gaps of more than twice that amount.
The retiree health-care fund faces a $1.2 billion shortfall within five years unless contributions increase or steps are taken to reduce the gap, according to the teacher system report.
At least 44 states, including Texas, have adopted pension changes since the beginning of 2009 to lower unfunded liabilities, according to the Legislatures group in Denver. Texas placed 36th among states with unfunded liabilities in the Bloomberg Rankings report, while New York was the only one with no gap between assets and future obligations.
California lawmakers passed measures last week to cap pension payments and to require new workers to pay half the cost of their benefits and to work longer before retiring. The changes omitted defined-savings plans sought by Governor Jerry Brown, a Democrat, and opposed by union leaders.
In Texas, there’s no cause to tamper with public pensions, although a fight can be expected when lawmakers take up the issue, according to Ted Melina Rabb, a senior legislative agent for the state’s American Federation of Teachers affiliate.
“The pension side is not in a crisis in Texas, and given the structure of our system and the very modest benefits, the constitutional protections, it’s just unreasonable to project that we are going to be in a difficult situation at all compared to other states,” Rabb said from Austin. The union says on its website that it represents 27,000 members statewide.
Clearly moving to 401(k) plans isn't a solution -- just look at America's 401(k) nightmare and you'll understand why this option is just plain dumb as it will throw millions more into pension poverty.
But faced with soaring pension costs, and bondholders getting restless, politicians are scrambling to get the situation under control to avoid going into receivership. The problem is they're responding by enacting band-aid reforms instead of adopting comprehensive ones which include reforming governance at public pension plans.
Rhode Island's pension scars will show up throughout the United States. Years of neglect and mismanagement have come home to roost and unfortunately, it will be the poor who rely on social services and pensioners who'll pay the ultimate price. Taxpayers will also foot the bill as the cost of running their schools and local services will skyrocket.
Meanwhile, bondholders and those underwriting municipal debt (JP Morgan) will for the most part make off like bandits. This is why I scoff at the idea of a "new world order". There's nothing new here, when the music stops (ie. when the money runs out), everyone feels the wrath of bondholders. This is true in Greece and in the United States.
Pension woes are a subject you won't hear from either candidate during this election season. It's a shame because this is a problem that will hammer state and federal budgets for years to come.
Below, Michelle Obama's amazing speech to delegates at the Democratic National Convention. Watching her speak makes me wonder why she's not the one at the Oval Office. Forget Hillary, Michelle Obama in 2016.
Finally, Quebec elected its first woman premier yesterday, Pauline Marois, leader of the Parti Québecois. She will now lead a minority government. Unfortunately, her victory was marred by a deranged idiot who shot one person dead, disrupting her speech (watch video below).