PROVIDENCE – On Monday, April 2, 2012, the Rhode Island Public Expenditure Council (RIPEC) will release a Public Policy Issue Brief titled “Fiscal Stress and Municipal Bankruptcy: History and Implications for Rhode Island”. The brief examines the current fiscal climate in Rhode Island’s cities and towns, Chapter 9 bankruptcy code, the process the state has established for communities facing insolvency, up to and including bankruptcy, and an overview of the Governor’s proposed municipal flexibility provisions. The report finds that, although bankruptcy may be the only option for some municipalities to substantively restructure their financial obligations, it is not a panacea for all communities and that increased fiscal flexibility may be a better route for communities in fiscal distress. The full report is available here.
Local government revenue sources have been declining in recent years. Between FY 2008 and FY 2012, direct state aid to local governments in Rhode Island was reduced by 72.6 percent. Moreover, as residential property values have seen steep declines in the recent recession, local tax bases have eroded. The resulting pressures on local governments to meet service level demands given increasingly constrained resources, coupled with unaffordable expenditure structures that some communities have not modified, have pushed some local governments to the brink of insolvency. Notwithstanding the efforts of multiple receivers to repair the city’s finances, the City of Central Falls became the first municipality to file for bankruptcy in the state’s history. More recently, a budget committee has been appointed in East Providence, and two other communities – Providence and Woonsocket – face substantial current-year deficits.
Although bankruptcy may have been the only option left for Central Falls, Chapter 9 must, ultimately, be viewed as the option of last resort for municipalities faced with impending insolvency. The tangible and potential costs are too great to view bankruptcy in any other light. In recognition of the fact that a one-size-fits all approach may not be the most efficient or effective resolution to the problems faced by the state’s municipalities, enabling legislation that provides relief from state mandates may be the most effective means of addressing municipal fiscal stress given the current economic climate. Moreover, the parties subject to this restructuring effort – employees, retirees, vendors and debtors – may be best served by local officials empowered to make modifications to these agreements, ideally through a collaborative process, rather than through bankruptcy, in which the primary goal is to make the community fiscally solvent.
If municipalities do not act, to the extent possible, to resolve their fiscal challenges the state itself can, and should, intercede on behalf of a municipality in order to provide a pathway to solvency. Enabling legislation granting fiscal flexibility – which RIPEC has long-advocated – would empower communities to regain control of their fiscal houses and respond to their unique sets of challenges, consistent with the principle of home rule. In turn, communities must take a proactive approach to restructuring their finances before they become insolvent. At the same time, these provisions would serve to further legitimize the process of state oversight and intervention, should a community require such assistance.
