Central Falls, Rhode Island faces a plight that should be studied for its application elsewhere. It is nearly out of money. This is common news today, whether in Greece or California. The various parties are assumed to possess a means to carry on. This is assumed because it is generally so. The banks had the Fed; General Electric had the Fed and the FDIC; Greece has the ECB; California is prepared to launch a bridge loan.
Despite the band-aids, the trend towards insolvency continues. Central Falls has reached a dead end.
Quoting The New York Times (July 11, 2011): “The impoverished city, operating under a receiver for a year, has promised $80 million worth of retirement benefits to 214 police officers and firefighters, far more than it can afford. Those workers’ pension fund will probably run out of money in October…”
The retirees face a bleak future: “Central Falls, like many American cities, has not placed its police and firefighters in Social Security. Many have no other benefits to fall back on.”
The inability to meet payments, as is true across the western world, was evident decades ago. The parties refused to think through the consequences of their actions: “The city, just north of Providence, is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York. These uniformed workers can retire after just 20 years of service, receive free health care in retirement, and qualify for full disability pensions when only partly disabled.”
The previous paragraph reflects poorly on the grand wizards of Central Falls. The Times noted: “Central Falls…filled mostly with immigrant families, struggles on a median household income of less than $33,520 a year… The typical single-family house…is worth about $130,000.”
Although this was a news story, the Times reporters, Mary Williams Walsh and Abby Goodnough, could not restrain their fury: “It is hard to see how anyone thought such an impoverished tax base could come up with an additional $80 million for retirement benefits. If the city were contributing the recommended amount to the plan each year, it would take 57 percent of local property tax revenue.”
That is hindsight. We are used to expedients: delayed pension contributions; 8% projected investment returns; economic recoveries around the corner; market recoveries around the corner; real-estate appreciation (higher tax receipts); higher tax rates; bank loans; bond issues; state bailouts; federal bailouts.
These avenues are closed. The state of Rhode Island “has an investment-grade credit rating, but it is in no position to bail out a string of teetering cities, or take over their shaky local pension funds the way the federal government does when some companies go bankrupt.” The Pension Benefit Guaranty Corporation is the backstop to private pension plans. None exists for public plans. (Could there be a Christmas Eve Special – see emergency decrees on December 24, 2009, when no one was looking – that sweeps all public pension benefits into Uncle Sugar’s side pocket? No doubt.)
The state of Rhode Island may follow its mendicant municipality’s plight: “Rhode Island must…stabilize its own pension fund, which continues to require more and more cash each year, despite four overhauls since 2005 that were supposed to get the cost under control. The Securities and Exchange Commission is investigating. If the state turns out to have understated its commitments, it could deliver a new jolt to bond markets still nervous after two traumatic years.”
Rhode Island is reluctant to seek federal aid for itself (a possible source of funds for Central Falls): “State lawmakers are trying to contain the damage, mindful that it would be a bad time for any state to seek help in Washington.” As a practical matter, one in four of the cities and towns in Rhode Island are in “some degree of distress.” A well-funded state would not know where to start.
A bright side to Central Falls’ requiem is that it must make decisions today that most others will avoid as long as possible.
An example of the latter is Cambridge Hospital in Cambridge, Massachusetts. The Boston Globe (July 11, 2011) reported: “A state Superior Court judge has ruled that the owner of Cambridge Hospital can’t move forward with its plan to cut retiree health benefits for 289 nurses, a decision being hailed as a victory by the Massachusetts Nurses Association.”
The judge is delirious. He would fit right in with the empty suits at the European Central Bank. Living in a world of make-believe, he (and they) interpret laws and freeze reality as if it were 1953. (Under Massachusetts law, courts are to interpret pension benefits within “reasonable expectations” of the beneficiary.)
Cutting to the chase, the owner of the hospital is down to its last buck. “An accounting change… would increase the hospital system’s costs by about $30 million over the next three years. The proposed cut [40% of the current benefit] prompted the union to reject a ‘last and final’ contract offer last summer.”
As with Central Falls, the avenues to acquire cash are shut (extrapolating from the article). The judge decided to ignore the facts and make matters worse for the nurses. Matters will be worse because Central Falls may be one of the first municipalities to go belly-up, but it won’t be the last. And as the old adage goes, if you’re going to go bankrupt, it’s better to be the first. The first to go bankrupt is also the first to sell off assets, cut spending and begin restoring solvency and economic viability.
Municipalities like Central Falls will have to sell or lease highways, parking garages, bridges, sewer systems, water systems, utilities, and many other services traditionally provided by states, counties and towns: from garbage to schools.
Central Falls may be fortunate in selling before prices plunge. A great buyer’s market is in the making.
Frederick Sheehan,for The Daily Reckoning
Frederick Sheehan is author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession and co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. Sheehan was a director at John Hancock Financial Services where he wrote the Market Outlook and Market Review. He contributes to the Gloom, Boom & Doom Report, Whiskey & Gunpowder, and the Prudent Bear, among others. He also advises an investment firm and a non-profit foundation. Sheehan is a CFA and graduate of Columbia Business School.
SOooooo…..who is holding the debt?
It is really very simple. A worker should get paid and his retirement money should go immediately into his personal account. There should not be ANY compensation due when the employee leaves or retires. This keeps everyone honest and prevents future liabilities.
Yes. We here on Wall Street would love to have control of your personal retirement accounts! We would, of course, collect the mandatory 5% fee each and every year you have your account with us.
Pay no attention to that Social Security tax the government collects for your retirement.
Sounds like you’ve laid the groundwork for QE3 pretty effectively there, Fred.
Imagine you have a $50,000 income. You have a $336,000 mortgage and you go to the bank every year seeking a $30,000 loan. Now the banker won’t loan you all you desire to support your current lifestyle? So you find a monopoly game (aka printing press) and begin paying your obligations with monopoly money. So, how long do you think that can last?
Thanks for posting about this, I would love to read more about this topic. Well put Frederick.
When you've got a room full of 200 oil insiders scratching their heads at current high prices, something's gotta give.
For most investors, it’s weird to think of stocks as their go-to investing option.
The petropoly has bills to pay and setting the price of oil was a simple way to balance their budgets.
Investors don’t seem to care that what's propping up their investments is what will ultimately destroy them: government monetary policy.
For the next decade the energy revolution will be likely confined to the US, displaying the robustness of American entrepreneurship.
Why the Sage of Baltimore’s commentary persists through America’s changing times.
After attending Platt’s oil conference in London I want to relay two important themes you need to know.