<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Josh Barro</p> <p>In Tuesday's New York Times, Joe Nocera has a <a href="http://www.nytimes.com/2012/06/19/opinion/nocera-when-alec-takes-over-your-town.html?_r=1&amp;ref=opinion">column </a>on the troubled city of Woonsocket, Rhode Island. Nocera contends that the city of 41,000 is being forced toward bankruptcy by anti-tax lawmakers under the influence of <a href="http://www.bloomberg.com/news/2012-04-23/republican-group-subject-of-irs-complaint-on-lobbying.html">ALEC</a>, the controversial association of corporate donors and conservative state lawmakers.</p> <p>Unfortunately, Nocera hasn’t done his research, which leads him to minimize the severity of Woonsocket’s insolvency. He contends:</p> <blockquote><p>Pensions are not the core problem in Woonsocket. Yes, Woonsocket has a pension shortfall, but it is more manageable than many other places and has almost nothing to do with the current crisis.</p></blockquote> <p>This is just wrong, wrong, wrong. The truth is that Woonsocket is the most indebted municipality in Rhode Island, relative to its property tax base, and a majority of its debts are related to pension and health benefits for municipal retirees.</p> <p>On its face, it looks as if most of Woonsocket’s debts are not pension related. Most of its employees participate in pension systems run by the state. Its one local plan is 61 percent funded—bad by national standards, but significantly better than some other municipalities in Rhode Island, where pension funding tends to be especially dire. Total unfunded pension liabilities are $71 million, compared with a city population just over 41,000.</p> <p>But Woonsocket’s pension problems don’t all show up on its pension fund financial statements. That’s because, until 2002, Woonsocket’s only local pension system—which covers police and firefighters hired before 1985, nearly all of whom are now retired—was 0 percent funded. The city set aside no money whatsoever for pensions and simply sent checks to retirees out of current revenues. Such systems were common decades ago, but most jurisdictions had abandoned them by 1980. Woonsocket was the last municipality in Rhode Island to do so.</p> <p>When the city switched to pre-fund this pension system, it issued $90 million in Pension Obligation Bonds. Effectively, it converted its unfunded pension liability into a bond liability. In 2002, the city reported the system was fully funded, having been filled up with the bond proceeds. Of those bonds, $87.3 million are still outstanding, but they’re now counted as a bond liability, not a pension liability.</p> <p>Woonsocket’s pension finances have gotten much worse in the ensuing decade. A combination of poor financial performance and underfunding—in fiscal year 2009, the city made just $26,200 of a $1.5 million pension payment that was due—led the local pension system’s funding ratio to fall to 61 percent (or 58 percent, if you use a more recent asset value).</p> <p>Now the city must close a $45 million funding gap in that pension system while paying off the $87 million in pension obligation bonds outstanding and paying pension costs for other employees who participate in the (also underfunded) statewide pension system. There is also $180 million in accrued but unfunded health benefits for retirees.</p> <p>A million here, a million there, and pretty soon you’re talking about real money. As WPRI’s Ted Nesi <a href="http://blogs.wpri.com/2012/06/14/woonsockets-problems-include-debt-botched-2003-pension-fix/">notes</a>, when you add together bond debt and unfunded pensions, Woonsocket is the most indebted municipality in Rhode Island. Of that debt, 57 percent consists of pension funding gaps, pension obligation bonds, and unfunded retiree health care obligations. That—not some ALEC-driven conspiracy—is why Woonsocket is on the verge of bankruptcy.</p> <p>So, Nocera is wrong about the source of Woonsocket’s troubles. But is he right that Woonsocket’s state representatives ought to have agreed to a plan that would have raised the city’s property taxes 13 percent in order to stave off receivership? It’s not obvious.</p> <p>You can think of municipal debt as being like a mortgage borne by all the property owners in the city. In Woonsocket, that mortgage balance is equivalent to 20 percent of your home’s value. That burden makes people disinclined to build or buy in the city, and since Woonsocket is small, it’s not hard to simply move elsewhere.</p> <p>Two other Rhode Island cities are almost as debt-laden as Woonsocket, and the choices they’ve made are instructive. Central Falls couldn’t handle the tax levels needed to service its debts and went into receivership, ultimately sharply cutting pension payments to retirees. In Providence, Mayor Angel Taveras has called bankruptcy “an absolute last resort,” but he’s also refused to raise property taxes. Taveras has succeeded in getting significant pension givebacks and contributions from nonprofits in the city, and may avoid bankruptcy.</p> <p>Woonsocket isn’t as poor as Central Falls, so its taxpayers may be better able to shoulder an increased property tax burden. But unlike Providence, it can’t lean on Brown University or a major hospital system to cough up more money. If the city plans to honor all its debts, the money will have to come from regular taxpayers.</p> <p>As with many Rhode Island municipalities, Woonsocket needs to decide whether trying to service all of its obligations amounts to throwing good money after bad. But it’s much harder (both politically and, in Rhode Island, legally) to discharge a bond obligation than a pension obligation. So, the fact that Woonsocket issued so many Pension Obligation Bonds means that receivership might actually be less useful for Woonsocket than it was for Central Falls.</p> <p>Whatever happens in Woonsocket, there will be a lot of hard choices made and pain experienced. Defenders of the public employee compensation status quo desperately wish that weren’t the case, and that Woonsocket’s troubles were simply invented or created by ideologically-driven conservatives. As actual lawmakers in Rhode Island—most of them Democrats—are learning, the situation isn’t nearly that simple.</p> <p>(Josh Barro is a contributor to the Ticker and a fiscal-policy analyst based in New York.<a href="https://twitter.com/#!/jbarro"> Follow</a> him on Twitter.<a href="http://topics.bloomberg.com/new-york/">)<br></a></p> </body> </html>