A City Upended by Unions
Central Falls's receiver raised taxes,
which drove people
out of town.
Wall Street Journal, August 5,
2011
On Monday the small Rhode Island
town of Central Falls
declared bankruptcy because its sky-high labor costs had impaired its ability
to pay its bills. The ratings agencies say the development is no surprise, but
we wonder whether they'll be saying the same thing when a bigger city falls off
a cliff.
Central Falls's financial problems are not much different from many states and
municipalities. Inflexible and costly collective bargaining agreements have
driven up its labor costs and crowded out services. The city is running $5
million annual structural deficits on a $16 million budget. Its pension and
retiree health-care bills add up to $80 million. Public safety officers
contribute a mere 7% of their salaries to pensions and can retire after 20
years with pensions equal to 50% of their final year's salary. Such a system in
which employees spend more time in retirement than working is unsustainable. Greece, Q.E.D.
In the last year the state has appointed two receivers to
bring the city back from the dead, but neither has been able to repeat the
miracle of Lazarus. The city's first receiver Mark Pfeiffer raised property and
car taxes by more than 20%, but higher taxes merely drove residents out of
town.
In February Governor Lincoln Chafee replaced Mr. Pfeiffer
with retired state supreme court judge Robert
Flanders. He, too, asked the unions for concessions but came up empty-handed.
Mr. Flanders then shut down the city library and community center. In a last
ditch effort to save the city from bankruptcy, Mr. Flanders asked retirees to
accept scaled-back pensions and to contribute more to their health benefits.
The retirees overwhelmingly voted no.
The bright side of Central Falls's
saga is that it's causing Rhode
Island lawmakers to double down on pension reform. As
Governor Chafee said earlier this week, "This is not just a Central Falls issue, this
is a state issue." Dozens of towns in Rhode Island,
including Providence,
have similar pension problems. The state's pension system, which has a $7
billion unfunded liability, is one of the worst funded in the nation.
Mr. Chafee, an independent, and the Democratic state
legislature have committed to tackling pensions in the fall. State treasurer
Gina Raimondo, a Democrat, recently issued a report
that suggests modifying retirees' cost-of-living adjustments, raising the
retirement age and creating new hybrid pensions that include a 401(k)-style
plan and a modest defined benefit. These all sound like good ideas, but the
test of Democrats' sincerity will be when the unions turn out en masse at the
capitol to denounce them for betraying their party and trashing collective
bargaining.
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