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The Ticking Time Bomb of Public Pensions: What Happens to Retirees When the Money Runs Out?

10-24-2018
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CENTRAL FALLS, RI – Central Falls is Rhode Island's smallest city, but it's made some big headlines.

In 2011, it became one of the first cities to file for bankruptcy. After years of economic mismanagement, the city of 19,000 was broke. 

When something like this happens, cities face major cuts and sacrifices to get back on track. In the case of Central Falls, the state brought in retired state Supreme Court Justice Bob Flanders to help right the city's finances. Those who had to sacrifice were workers expecting retirement payouts.

Bankruptcy Hits Public Sector Retirees Hard

"Bankruptcy is typically called a 'community of pain,' where all the creditors share in the hardship and the pain caused by the bankrupt entity's inability to pay its bills," Justice Flanders told CBN News.

"Here, because the state protected its bondholders, the entire restructuring had to be born by the state's retirees and active employees."

In a public auditorium back in 2011, Justice Flanders had to face pension earners and tell them they had two options: risk losing their entire pension, or give up 50% of it. 

Delivering a Painful Message

"I had to deliver that very difficult and painful message to people who had retired relying on this," Flanders said. "So it was a horrible thing to have to do."

A pension is a promise. City employees like police and firefighters work for a set number of years at relatively low pay in exchange for higher, guaranteed benefits once they retire.  
 
"In the case of police and firefighters in Central Falls, they were being allowed to retire after 20 years and so the average age of these retirees was in their late 40s – 48 I believe," Flanders said.

"And so they typically still had many working years left, so they were able to get a pension and then to go out and get another job someplace else and supplement their income for the rest of their working lives."

Central Falls' Ticking Time Bomb

Decades went by in Central Falls, with each administration talking about better pensions and benefits. Meanwhile, no money was coming in to pay for those promises.

Pension debt remains almost invisible. That is until it's time for the city to pay retiring workers.

"This is the poorest city in Rhode Island, and it hadn't seen any tax increases for years, despite ever richer pension benefits. So that ended up in a very bad situation where they couldn't pay their bills any longer," Flanders explained.

Central Falls Workers Take Immediate Hit

Both active duty and retired Central Falls workers took an immediate hit. 

"You didn't know if you were going to get a paycheck every two weeks so that first started," said Central Falls police detective Jeff Arujo. "And at the same time, you're responding to dangerous calls, so you're trying to separate your personal and professional opinion about what's going on, but you still have to do your job."
 
Some Retirees Left with No "Plan B"

While those on active duty had time to work on a "Plan B," retired police and firefighters found themselves in the lurch. 

"It dramatically affected them," Arujo said. "Two of the members that I know had to go into foreclosure with their houses. And that's at 70 years old or in your 80s where you counted on this. And these are officers who did 25 or 30 years on the job. It was hard to see and we couldn't do anything for them from the perspective of the union because we were all trying to fight for something."

CBN News reached out to several affected retirees. Their response: After years of fighting to get what they'd been promised, they feel worn down, defeated, and sick of talking about it. 

They're also tired of seeing their loss used as a cautionary tale for other cities that probably won't heed the warning.

"Putting your head in the sand about this like an ostrich isn't going to let the problem go away or get any less severe," Flanders said. "It's one that continues to grow with each passing year. And so while the overwhelming temptation is to kick this can down the road as long and as hard as you can, so you don't have to deal with it and you leave it for somebody else, in the hope that you won't be there when everything explodes, that's obviously not a very good way of solving problems."

An Effective, but Painful Remedy

In Central Falls, Flanders recognized pension benefits as the biggest part of the problem. As painful as it was, he faced them, defusing the time bomb in the process.

"In my judgment, it's a very effective remedy to deal with issues that, for whatever reason, politically have been unpalatable and unacceptable to the elected officials," Flanders said. "So to bring in somebody like me, from the outside who can have the power to restructure, not having worry about getting reelected or pleasing groups that helped him get elected or funded his or her campaign, that is enormously helpful to get the job done," he concluded.
 
Will Other Cities Heed the Cautionary Tale?

Other cities would do well to take note of what happened in Central Falls because their retiring workers will also expect to collect a pension.

According to one report, however, more than half of the states aren't prepared to pay for the promises made to public employees.

Still, someone must pay the price for this extremely broken system when the bill comes due. The question is, who?

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