Bankruptcy. It is not exactly a pleasant thought, but it could be in your future. Unthinkable? Read on…
Central Falls, Rhode Island is a small town about a 15 minute drive north of Providence, Rhode Island. It has 19,000 residents. But, it has a problem…with an annual budget of $17 million, it has $80 million in unfunded pensions, $21 million in outstanding debt, and $5 million of projected deficits for each of the next five years.
The town tried to get concessions from those on pensions, but, the retired employees refused. So, on Monday, Central Falls filed for bankruptcy.
Now, Central Falls has asked the Bankruptcy Court to “reject” (a fancy legal term that means void the contract in its entirety) the union collective bargaining agreement. Until the court rules on that (parenthetically, the court will reject the contract), Central Falls will pay its retirees what the town had last offered. After that rejection, its anyone’s guess what retirees will get, if they get anything.
And, Central Falls is not alone.
Alabama’s Jefferson County is currently working to ward off the largest municipal bankruptcy in U.S. history stemming from its $3.2 billion sewer bond crisis. The Pennsylvania state capital of Harrisburg, which has about $300 million incinerator debt, is also considering bankruptcy.
There are several lessons here, but let me focus on just one…”tax the rich”.
I don’t know how many “rich” live in Central Falls. But, let’s assume all 19,000 residents are “rich”. Each resident’s taxes will need to increase by $4200 just to cover the unfunded pension liabilities. Each resident’s taxes will need to increase by $1100 just to cover the town’s outstanding debt. Each resident’s taxes will need to increase by $260 per year for the next 5 years just to cover the projected annual deficits. Of course, some of those residents are only 4 years old, which makes matters even worse.
Using those numbers, it’s clear that Central Falls doesn’t have a revenue problem, it has a spending problem.
Does any of this sound familiar?