As citizens in Warwick continue to mobilize in response to a perceived fiscal storm looming in the city – one rooted primarily in what some claim are irresponsible and unsustainable legacy costs – the Warwick Financial Crisis Committee invited former Rhode Island Supreme Court judge Robert Flanders to speak about potential solutions that could perhaps lead to calmer waters.
He had an answer, which he provided to more than 100 attendees this past Thursday evening at Warwick Public Library. But it was an answer, he said, that elected officials in Warwick likely do not want to hear – advocating for a full “reset” of the city’s financial situation through use of the Fiscal Stability Act.
“The good news is there are remedies to dealing with this. The problem is that it takes a while to convince political authorities that this is the way to go, because they view it as much too radical,” Flanders said. “They see it as admitting failure and, when that happens, their power gets kicked to the curb and some stranger comes in to do what has to be done to get the city and its finances in the right place. So, it’s a very difficult proposition for most mayors and city councils to accept.”
The Fiscal Stability Act, passed in 2010, gives power to the state to appoint receivers to guide municipalities through financial crises rather than the courts. It has three levels of intervention, the least severe of which is a “fiscal overseer” that comes in to work in a supervisory capacity in accordance with city officials. The next level is a budgetary commission, while the most severe measure is receivership, in which an outside individual comes in to restructure obligations and begin the bankruptcy process, if needed.
Flanders – who challenged U.S. Sen. Sheldon Whitehouse in the 2018 election – knows a thing or two about the Fiscal Stability Act, and the pros and cons of a struggling municipality declaring bankruptcy. He is the only person in the state who has ever taken a city through the full process of receivership, which occurred when he was brought in as the state-appointed receiver to bring Central Falls back from insolvency in 2011.
He recalled Central Falls being in a position where it was beginning to default on its fiscal obligations. At that point, the state – specifically the Department of Revenue, which is in charge of declaring an emergency bad enough to warrant a receiver and is therefore also in charge of allowing a municipality declare bankruptcy – had no choice but to intervene, he said.
What occurred over the next 13 months was an example, Flanders contends, of how receivership can provide a necessary catalyst for change that otherwise would never be realized – namely by forcing collective bargaining groups to the table to renegotiate contracts that, while they may contain great deals for the union members, have come at the expense of the city’s financial health.
In order to file for bankruptcy, municipalities must make good faith efforts to resolve their financial problems at the bargaining table, such as through concessions of provisions like automatic cost-of-living adjustments (COLAs) for pension recipients and lucrative healthcare benefits. However, if unions refuse to budge on such terms, the receiver then has the power to file for bankruptcy and begin the process of restructuring deals anyway, usurping all other authorities in order to get the finances back in order.
“The significance of that is immense. Entering bankruptcy, from the day the filing occurs, the receiver can void any and all contracts that have been entered into,” Flanders said. “There are no breach-of-contract arguments that can stand up in that situation, there’s no takings arguments, there’s no legal objections that can be leveled … The only job of a receiver and the bankruptcy court is to come up with a balanced budget that the city can afford.”
By the end of the process, Central Falls had a five-year “recovery plan” in place and was no longer insolvent. Flanders said the process did away with contractual language that had harmful consequences for the city in terms of excessive overtime and healthcare costs.
“They’re doing much better now,” he said, adding that Central Falls has claimed the title “The Comeback City” in the years since the process began.
To Flanders, while no municipality or municipal leader wants to admit to needing the help of a receiver or wants to entertain the bankruptcy process – and filing for bankruptcy would have implications for the city, such as a hit to their bond rating and lasting oversight from the state – refusing to acknowledge an apparent financial problem is much worse.
“My view has always been that the negative implications are greater from doing nothing,” he said. “If you have a problem, is it better to fix the problem and get on a better course for the future, or let it fester and grow worse? To me, all of the adverse impacts, the impact on property values, people leaving the city, these things are happening already. If we have a problem, let’s face it and fix it.”
A matter of political will?
There are certain “triggers” that put any Rhode Island city or town in the potential crosshairs for receivership, including failing to submit financial audits in a timely manner for two consecutive years, projecting a deficit for two consecutive years, being downgraded by a rating agency or being unable to secure credit for borrowing purposes. Achieving any two of those criteria opens up the municipality to the terms of the Fiscal Stability Act.
Ken Block, a Warwick businessman, former gubernatorial candidate and founder of Watchdog RI, also spoke at the meeting on Thursday and said that he felt Warwick had already hit at least two of those criteria.
The city has failed to submit its required annual fiscal audit by the Dec. 31 deadline (following the close of each fiscal year on July 1) for 11 consecutive years – and the most recent audit for FY18 still hasn’t been submitted, as the city recently got its fourth extension to submit the report by July 23. Solomon reiterated on Monday that the city has submitted all necessary documents to its auditing firm, BlumShapiro, but due to vacations, they haven’t been able to finalize the numbers yet.
But Block also contends the city has projected a structural deficit last year and in years going forward, and that the city likely faces a downgrade in its bond rating due to a provision that states a municipality must have more than 10 percent of its total budget in reserves otherwise it could face a downgrade.
It is not known exactly how much Warwick has in its cash reserves at this time, although Solomon said during his State of the City address in February that the number was around $13 million to $14 million, and the city recently allocated $2.4 million of that to balance the FY20 budget that passed in late May. He said on Monday that “squeezing the stone to draw water will show a more fruitful result, and I’ll let the numbers come in on their own.”
Regardless of all this information, Flanders made sure to emphasize that even if those conditions for eligibility under the Act are met, it is ultimately up to the Department of Revenue – whose director is a gubernatorial appointment – to begin the process.
“In the end, it’s a political decision on the part of the state to jump into these situations,” he said.
Flanders also contends that political decisions are often responsible for cities and towns getting into financial trouble in the first place.
“This isn’t Mayor Solomon’s fault,” he said. “It’s probably been going on for years with prior administrations. That’s what we were facing in Central Falls. They gave away benefits, they got contributions from the unions to run for office and everything was fine until the chickens started coming home to roost and everybody realized this was unsustainable and can’t go on.”
What should be looked at?
A reassessment of these types of agreements is exactly what attendees of the meeting on Thursday night are calling for. They specifically mention automatic COLAs within pensions and lucrative healthcare benefits – which include provisions like lifetime healthcare for city retirees with no co-pays and no requirement to switch to Medicare once hitting age 65, as well as comprehensive prescription medicine coverage – as some of the most glaring examples of things that must be re-examined.
“We cannot cover the expenses with a maximum tax increase every year, so something has to be done,” citizen advocate Rob Cote said. “When you look at this objectively, there really is no mathematical formula to come out of this. They cannot raise taxes enough, fund the schools, pave your roads and pick up your garbage and support our retirees. It’s impossible.”
Cote and Block brought up the five-year report commissioned by City Council President Steve Merolla last summer that showed Warwick was facing between $50 million and $130 million in deficits, depending on whether or not the city funded its other post-employment benefits (OPEB) liabilities. The report was never released, with city officials including Merolla and Solomon contending that the report was unreliable and not finalized, until the Boston Globe got hold of it.
Solomon said that “you can blow your nose” with the report, but Block contended on Thursday that these numbers are the only snapshot of the city’s financial health available to the public, since the city has failed to file its FY18 audit.
“The city has not published its financial position for more than a year,” Block said. “They are [the city] utterly flying blind. They don’t know how much money you all have. They can’t tell you, and that’s horrifying. Because while they cannot tell you how much money they have, they are approving next year’s budget, they are ratifying contracts … Every one of you sitting here tonight should be furious about that, because it is utterly reckless. It’s worse. I believe it’s fiscal malfeasance.”
Block, Cote and Flanders all said that the only way city officials would admit to there being a possible need for state intervention into finances is to establish a clear presence at city meetings and at budget hearings going forward. Even then, Flanders said it will require bravery on the part of city leadership to admit to a problem in the first place.
“The politicians are very good at hiding these numbers, and they’re very good at kicking the can down the road because they don’t want to face this for all the reasons I talked about,” he said. “They want to be out of office when all of this explodes.”
Solomon: City not in crisis
Responding to the tenor of the meeting, which featured attendance from those almost exclusively of the view that the city is hurtling toward a financial cliff, Solomon categorically denied that Warwick was in such peril during a phone interview on Monday.
“Warwick is not in that situation. There is no financial crisis blooming,” he said. “There have been difficult times and adjustments, and no finance department in place when I took over, which has resulted in delays [submitting fiscal audits].”
Solomon said the FY18 audit – which summarizes the city’s financial state from July 1, 2017, to June 30, 2018, and was due on Dec. 31, 2018 – is in the hands of the city’s auditing firm, BlumShapiro, but due to vacations within their staff, they haven’t been able to finalize the report by the city’s third deadline extension, which passed in June. They now have a final deadline extension of July 23.
“They assume that because of the delay, somebody is trying to hide something,” Solomon said of the audit. “But the truth will prevail, and those people will be proven wrong. The numbers are there.”
Solomon said that “the preliminary indication is the numbers are pretty good and that Warwick is on the right track, and it’s only going to get better next year.”
Solomon said he will continue to bargain in good faith with labor unions, and mentioned how the fire department is currently in arbitration with the city regarding its contract situation.
“We’ll continue to negotiate and as we go forward you will see changes,” he said. “Things cannot remain the way they’ve been because you want to be able to sustain.” He mentioned police and municipal workers being incorporated into the Tier 2 pension system as an example of a savings to taxpayers in the long run.
Solomon said that the people drumming up fear about the city’s financial condition were either seeking attention or were operating under false pretenses, such as the aforementioned five-year report, which included the assumption the city would draw $4 million from its free cash reserves. Solomon pointed out the city only drew $2.4 million.
He was firm in his stance against entertaining the thought of bankruptcy in Warwick’s future.
“Receivership is not in the glossary of terms as long as I’m mayor and I plan on being here for a while,” he continued. “I do not agree with any of that [talk about financial crisis]. I believe it’s inaccurate and ill advised. They’re running on rumors, emotions and not facts, and it’s unfair to shed a negative light on a great city such as Warwick.”