04 September 2012

To Hell With the Women & Children! How One Group of Investors Hogged the Lifeboats

A Reuters report today was picked up by several news organizations.

The city of Central Falls, Rhode Island, filed for bankruptcy one year ago. It has now had its reorganization plan approved so that it can emerge ultimately from the bankruptcy process.

As is the case with lots of urban New England cities, the tax base has deteriorated partly because factories have closed and the jobs have either vanished or fled. The municipality is supported mostly by property taxes and the value property has fallen. Also, a larger and larger proportion of the residents live at or near the poverty level.

The devil is in the details, but the rock-bottom basics of recovering from an out of balance budget are obvious: increase income and/or reduce expenses. Central Falls is doing both.

Property taxes will be increased steadily over the next few years. There is the increased income.

Lots of folks will share in a lot of pain in reducing expenses.

60 workers, about a third of the city workforce, were fired. I cannot say that is merely a great misfortune or truly horrible. Perhaps it was the 60 people who knew how to put out fires and arrest criminals. Maybe it was the 60 people who taught tiddlywinks at the city park. I just don’t know. I do know that they were offered jobs in good faith, that they performed them at least to an acceptable level, that they depended upon that employment and now they are out of luck.  They are looking for other jobs.

Another group doesn’t have that chance. Retired city workers on pensions have been mauled by the bankruptcy plan. Reuters cites one retired police officer in his 80s whose pension of $27,000 per year is being cut to $18,200 per year.  He didn't volunteer that - It's just happening. At the same time, his medical insurance premiums are going up $100 a month. By the way, that employment was exempt from Social Security withholding, so this fellow does not have any Social Security from city work. He doesn’t have the opportunity to go out and find another job – or another pension. His only option is to smile and suck up the $10,000 yearly loss.  Or frown and suck it up.  The City doesn't care, it's the "suck it up" part that's important to the City.

Oh, by the way, many of these pensioners who are losing up to 55% of their pensions are also homeowners who will be – wait for it – paying higher property taxes.

But wait – one group is sharing absolutely none of the pain. Zero. Zip. Nada. Zilch.

Those are the city's bondholders.

When it looked like the city was getting in trouble, the Rhode Island legislature modified the Rhode Island statutes to place a lien in favor of city bondholders on property tax receipts. This made bondholders secured creditors and as such they are first in line to get paid.

Incidentally, the citizens paying the higher taxes and the pensioners receiving far less money are paying for their own screwing. The city (the taxpayers) paid to have the tax lien legislation written. The city (the taxpayers) are paying $3 million in fees for the bankruptcy process.  I'm in the wrong line representing mere people.  It looks like  you can represent things and clean up.

It would be nice to know the reasoning behind favoring investors over taxpayers and pensioners. I do not accept any political label for myself but I will say that I'm all for logic and order. I find it difficult to come up with a logical reason that the bondholders come out of this completely clean.

The individual taxpayers (and I’m including small businesses there) bought property in a city which sometime later got into financial trouble, possibly from poor management, possibly from other causes and probably from a mix of them. Workers who retired with pensions apparently were unskillful or unlucky in selecting who to work for decades before there were problems.

Investors – the bondholders – made an investment. Part of the return on that investment was interest which they could have made from the very safest investment. The amount of interest beyond that reflected some element of risk that something bad would happen to their investment. Something bad happened.

And those with political power protected the guys with the money and dumped on the working people.

And so I turn to one of the great revelations of American culture, given by the character Otter to Flounder in the movie Animal House.  The frat has just destroyed Flounder’s brother’s Lincoln automobile:

“You can’t spend your whole life worrying about your mistakes.  You f***ed up!  You trusted us!”

Silly people.  You trusted them.

The Central Falls reorganization plan can be found at:


A plug for Reuters:  I have tried lots of newspapers on the Amazon Kindle, especially the Washington Post and USA Today.  They do not adapt well to that format.  For some time now, I have subscribed to Reuters which is both cost effective and translates REALLY WELL to the e-reader.  I highly recommend that.

1 comment:

Jim N. said...

Hmmmmmm! Sounds strangely familiar to another "plan to save America" that has been in the news lately. Thanks for sharing the story, Roger.