The town of Central Falls, Rhode Island has declared bankruptcy. The problem? Legacy costs for retirees. Those costs were consuming nearly a fourth of the town’s budget and they could not be reduced through negotiations with the unions. City services have been cut drastically, taxes were hiked by 20 percent and the problem got worse as taxpayers fled the town. Interestingly, neither the governor nor the legislature came to the rescue with a big handout from other Rhode Island taxpayers.
Central Falls is likely to become the poster child for American cities and towns that have overpromised benefits that cannot be reneged upon short of a bankruptcy judge ordering the contracts and obligations voided. And even then it is difficult to accomplish as we have seen in other cases around the country. In Pennsylvania there are constitutional safeguards against taking away benefits awarded through contracts. And there is a strong legislative resistance to allowing municipalities to enter into bankruptcy because of the precedence it will set and the damage it might do to the ability of other towns to borrow money.
Nonetheless, when towns and cities reach a certain point, they will either be allowed to go into bankruptcy and seek relief or they might have to go out of existence. If no one is left to pay taxes, who will fund the obligations the town incurred? State taxpayers, maybe? Might work for some small communities but a Detroit or Philadelphia? That seems very unlikely.
The warning from Central Falls to the rest of the country-especially those states where public sector unions are powerful and exert enormous influence over who gets elected and how the elected officials vote on issues affecting unions-is this: Start reining in expenditures as fast you can and renegotiating as many benefit plans as possible. Outsource, privatize and reduce the employee count as quickly as can be done. Otherwise, absent finding gas or oil in town, the day will come when the plight of Central Falls will be at the door step of many other places.
