Central Falls in Rhode Island may be a "City with a Bright Future" as the town's website proclaims. But it doesn't have such a bright present, hitting such a rough patch that its finances have been taken over by a state-appointed receiver. Without enough money to pay its bills, the receiver is now seeking big cutbacks in pensions for retired Central Falls police and firemen.
Some retirees would be asked for haircuts approaching 50 percent of their pension. We're not talking about cushy deals that have outraged taxpayers in other parts of the country. According to public records obtained by The Providence Journal, the biggest payment among the town's 140 pensioners is slightly more than $52,000 a year. It goes to the widow of the town fire chief, who passed away last year after nearly 40 years at the department. Also, retirees never participated in Social Security taxes and thus are not entitled to its benefits.
Any pension cuts, of course, seem callous and unfair to retirees who laid their lives on the line for the residents of Central Falls. But who is going to pay to keep the promises made to these 140 retirees and their families?
In microcosm, Central Falls' story is not so different from what's happening in Washington with the debt ceiling and fights over possible cuts to Social Security, Medicare, and Medicaid. It's fine to defend benefits and argue that any cuts are unfair. But even if taxes were raised on wealthier people (not likely anytime soon) and all corporate loopholes were closed (even less likely) I haven't seen credible research saying we'd still be able to keep our entitlement promises to seniors. What do you do when the money runs out?
The reasons for Central Falls' problems are both familiar and sad—pension promises were made and not adequately funded. The city faces unfunded pension liabilities of $80 million, equal to about five years of its current total municipal revenues.
Central Falls is poor and its 19,000 residents live in only 1.3 square miles of space, making it Rhode Island's most densely populated town, according to the receiver's overview reports. Nearly 27 percent of its families live in poverty—nearly triple the state average. And when the town did a periodic reassessment of its residential real estate in late 2009, values had fallen 44 percent in only three years.
And when the Great Recession hit, the town just couldn't cope. Even with big tax increases, revenues can't begin to cover the town's obligations. Lots of fingers can be pointed at town officials. There is never a budget deficit in the blame column. But are these folks really much different than their national counterparts?
Central Falls is trying to avoid about a $5 million annual shortfall according to a five-year budget projection from the receiver last December. The town expects annual revenues of about $17 million a year, so if it somehow could borrow that $5 million, about 22 percent of its spending would be borrowed money. The federal government is now borrowing 40 percent of each dollar it spends.
The town has amassed outstanding municipal bond debt of about $23.4 million. That has to be repaid over the next 20 years along with an estimated $9.4 million in interest. Central Fall's outstanding debt equals about $1,230 per person. The federal debt of more than $14 trillion amounts to more than $45,000 for each American.
Perhaps the biggest difference between the governments of Central Falls and the United States is that Central Falls can't sell Treasury Bills and create money out of thin air. Such fiscal alchemy is reserved for the wizards of Washington.
But at the end of the day, we're running out of money just like Central Falls. And while we have scads of deficit reduction plans, and reports galore of "imminent" agreements, we don't have anything for Congress to actually vote on.
Virginia Democratic Sen. Mark Warner is one of the so-called "Gang of Six" senators who unveiled its own plan for reducing the deficit earlier this week. "If we don't get this fixed, all of us—all of us—ought to get fired," he said.
The view from Central Falls is not so different. "Give the pensioners what they want," said one comment on The Providence Journal website. "Then shut down the police, fire, library, schools, etc. Fair is fair. We all knew that we were borrowing on our grandchildren. The time has come for them to pay."