Is Bankruptcy for Providence on the Table?

Is Bankruptcy for Providence on the Table?

Is Providence out of the clear for bankruptcy?  While the city averted a $100 million plus structural deficit in 2011, Providence is facing a projected $17 million to $24 million budget gap in Fiscal Year 2016 (and even higher in FY17) - combined with an unfunded pension liability of $831 million.

Mayor-elect Jorge Elorza said on Monday that he does not believe bankruptcy is an option for Providence -- and that he is "committed to holding the line on taxes."  However, politicians to finance professionals are questioning the fiscal health and stability of the city.   

"Providence is in dire straits and needs to consider imposing a wealth tax totaling about $1 billion dollars, combined with another $500 million in additional PILOTs from Brown and other non-profits over the next 3 years to survive," said financial analyst and GoLocal MINDSETTER Michael Riley, who deemed Providence highest on the list of cities and towns in Rhode Island that could go bankrupt. 

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"In my mind, it's job one to understand fully the next 4 years of finance, especially Moody's comments specific to Providence and all over the country. The fact is if our General Assembly had not passed a law in 2011 placing bondholders in front of public workers, Providence would be junk rated now and in receivership," said Riley of Mayor-elect Elorza. "Any accountant can see that.  In my opinion Elorza (and Cianci) deflected and ignored all questions related to the financial condition of the city during the campaign. As politicians they knew that the truth was unelectable." 

Providence City Councilman Luis Aponte said that not only the FY16 budget was of concern, but the balance of the current FY15 one as well -- and how Providence could survive moving forward.   

"With almost half the budget year gone, there may be year end issues to address first," said Aponte. "There's currently over $7 million in one time fixes, many of which have not passed -- that needs to be measured and monitored, as well as on-going concerns for the [FY16}] budget."

"We will always struggle with half of our tax base untaxable.  We will always have to manage intensely our budget.  We're not going to cut our way, or tax our way, out of the doldrums," continued Aponte.  "I would say that everything should be on the table.  There's no magic move, something that will alleviate our fiscal condition.  We need to be a little more bolder in how we step forward in growing the tax base.  Bringing the New England Revolution here would be a bold step."

"We are conducting a full analysis of the budget," said Elorza spokesperson Marisa O'Gara on Monday.  "We look forward to working with the City Council in the coming years to grow our local economy and responsibly manage the city's finances."

Financial Projections

The FY2015-17 budget predictions from Providence Internal Auditor Matt Clarkin show that the projected budget gap for the city is over $17 million for FY16, and over $22 million for FY17.  

"We didn't do an update after the FY14 Q2 since we were looking at the TSAs," said Clarkin, referring to the reports on the city's tax stabilization agreements.  "We wouldn't do anything projection wise for FY15 Q1. The Q2 updated should be at the end of January [2015]."

Clarkin noted that he has had no talks with the Elorza transition team, and that he has not been asked to provide any information for the transition.  "What's up to date is online," said Clarkin.  

Aponte said that Clarkin's estimate didn't include the Council-approved reduction of the tax rate for rental property owners, and that while he expected about half of the one time budget fixes to be realized, the city would still have to address that $7 million stopgap in next year's budget.  

"That's problematic," said Aponte.  

Former Republican Mayoral candidate Dr. Daniel Harrop -- who ran on a platform of bankruptcy for the state's capital city and ultimately endorsed Elorza at the end of the campaign -- said he had spoken with the Mayor-elect Elorza following the election, but "had not discussed policy."  

"I think it will take about two years to see that things are not going to turn around quickly in Providence and the pension plus benefits deficit (two billion dollars) cannot be closed through growth. At that point, you are looking at steady, maximum-under-the-law tax increases year in and year out, which would further kills business, or receivership," said Harrop. "The most immediate problem is going to be the ongoing request for TSAs.  What good are new buildings on the Rt 195 land if we give them all TSAs, and if we don't give them will they even build?"  

"The Mayor-elect never took "off the table" the idea of bankruptcy, unlike [Cianci]; he just said he would prefer not to go there," said Harrop. "In two years it should be clear that shortly after that (the next two years, so at the end of four), receivership would be inevitable, and so starting this, the sooner the better."

Bankruptcy Lessons?

The City of Detroit, Michigan, has recently emerged from bankruptcy, and Detroit City Councilman Scott Benson spoke with GoLocal to offer his perspective.  

On November 7, Judge Steven Rhodes ruled that Detroit's comprehensive restructuring plan was "fair and feasible, providing the legal authority for the city to slash more than $7 billion in unsecured liabilities and reinvest $1.4 billion over 10 years in public services and blight removal," according to the Detroit Free Press.  

"The common person might not see anything right now, but I'll tell you that the finance department certainly does," says Benson.  "We ask people, 'Are services any better?'  I can't say that services are any better.  You're not going to see that right away.  It's a paper deal."

"What I can say through new leadership we have made some changes," continued Benson.  "We've privatized trash pick up.  I can't say it's any 'better,' but it's a different culture, and it's appreciated by the people.  We've been able to get a bond for new street lights --- we do get some complaints, but at least people are talking about it, the corridors are much brighter.  The balance sheet is much stronger, and Wall Street is looking at our bonds again."

When asked if he wished that Detroit had done anything differently in the process, Benson said that he wish they had "done it themselves."

"We would have gone into bankruptcy no matter what.  We could have done it on our own volition, instead we were forced into it," said Benson.  "We would have probably been in a much better position had we done it ourselves."

Former Central Falls Mayor Thomas Lazieh, however, said he believed that bankruptcy should be the last possible resort.

"I took over in [1990] when the conditions were worse than what it just went through [in Central Falls], said Lazieh.  "I brought in a staff that was dedicated to turning the city around with limited financial impact on taxes.  My first year we were forced to raise taxes to cover debt, and put money and more and more into the pensions.  We had to make personnel cuts, reorganize departments, and doing a lot of reorganizing financially. My background was working for the city 12-13 years prior."

"When Central Falls was going through it, I told the receiver and the Governor that going through bankruptcy was the worse thing to do -- and I said that handling in-house might take longer, but you deal with it in-house without negatively impacting the unions," said Lazieh.  "I believe when you make a contract, that should be honored."