THE 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 of the cliff.
Central Fall’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. Hello Greece!
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 cities first receiver, Mark Pfeiffer raised property and car taxes by more than 20%, but higher taxes merely drove residents to move 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 than 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 contribute to their health benefits. The retirees overwhelmingly voted no.
The bright side of Central Fall’s saga is that it’s causing Rhode Island lawmakers to double down on pension reform. As Governor Chafee said early last week, “This is not just a Central Fall’s issue, this is a state issue”. Dozens of towns in Rhode Island, including Providence, have similar pension problems. The states 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 retiree’s 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 Democrat’s sincerity will be when the unions turn out en masse at the capitol to denounce them for betraying their party and trashing collective bargaining.