The Ruin of Central Falls


Many local governments around the country are in bad shape, but few are worse than Central Falls, Rhode Island.  The city was already in receivership, which led to a bleak, but comical scene in which the state police confiscated the mayor’s car, cell phone, and keys to City Hall.  Don’t feel too bad for ex-Mayor David Cicilline, though.  Rhode Island voters sent him to Congress.

On Monday, the state-appointed receiver, Robert G. Flanders, filed for bankruptcy.  The Providence Journal explains what this means:

All contracts with municipal workers and retirees, including the fire and police departments, are immediately voided.

Retirees must begin to pay 20 percent of their medical coverage effective immediately, as Flanders proposed when he met with the city’s retirees July 19.

Pension payments are being reduced, and collective bargaining agreements with cops and firefighters have been rejected.

Flanders explained that he struggled mightily to avoid taking these steps:

“Everything was done to avoid this day,” Flanders said.

“Services have been cut to the bone. Taxes have been raised to the maximum level allowable.

“We negotiated with Council 94 and the police and fire unions, without success, attempting to reach voluntary concessions, and we tried in vain to persuade our retirees to accept voluntary reductions in their benefits.”

The city is running $80 million in unfunded pension and benefit liabilities, and was projected to add another $25 million over the next five years.  Flanders filed bankruptcy paperwork indicating the city would become unable to pay its bills no later than August 21, and “is no longer able to access capital markets.”

This is the kind of situation people like Governor Scott Walker of Wisconsin have been trying to avoid.  In Central Falls, intransigent union demands killed the city.  They gambled the government could never really go bankrupt… and lost.

Economic analyst Mike Shedlock made this fascinating observation:

Central Falls was bankrupt years ago and I said so repeatedly. The costs on taxpayers to delay this bankruptcy have been severe.

Once states realize that bankruptcy is not tantamount to statewide Armageddon, there will be a flood of city bankruptcies.

Big-spending governments disable the fiscal pain mechanisms that provide essential feedback to a business and its customers.  Very few state or local governments are “solvent” under the standards applied to private industry, and the federal government makes a mockery of the very concept.

Only a financially sound government, which avoids massive long-term deficit spending, can honestly present citizens with informed proposals to allocate resources.  By spending money it doesn’t have, government falsely leads citizens to believe they don’t have to choose between priorities.  The government’s finances are further corrupted by long-term promises, such as public union benefits, which are easy for vote-seeking politicians to make… but impossible to finance when the bills come due.

When the illusion finally ends – far beyond the point any private-sector corporation would have been forced to shut down – the results are brutal.  Irresponsible governance allowed the voters of Central Falls to avoid confronting the severity of their mounting problems, back when “moderate” solutions were available, just as a man with no pain receptors might glance down to notice his hand has burned away to ash in a fire.

The same fate awaits every corner of the United States.  In a few more years, we will all be living in Central Falls.

Correction: David Cicilline was the mayor of Providence.  The mayor of Central Falls leading up to receivership was Charles Moreau.  My apologies for the error, and thanks to those who pointed it out!