What Happened?
Providence mayor Angel Taveras inherited a $110 million structural deficit in 2011 that threatened to bankrupt the city but was able to turn around the financial crisis and prevent significant danger to the city’s success.
The Goal
Providence, like many cities across the country, was struggling to recover from the economic downturn with persistent financial hurdles that could lead to bankruptcy if left unattended. Providence had spent significant portions of the city’s reserves during the recession to keep all services operating as usual. Taveras was facing unfunded pension liabilities, dwindling industrial activity, a poorly performing housing market and drastic reductions in state aid, The Atlantic Cities reported.
Providence was showing signs of potential bankruptcy that were being reported across the country. Taveras assumed the position of mayor of Providence with a $600 million annual budget and demands to cut funding for all programs and departments including fire and police, teachers, city employees, retirement benefits and community institutions.
The Magic Solution
Taveras approached the massive cuts needed to balance the budget by first approaching the unions privately and inviting them to discuss different solutions. The mayor presented unions with a target savings point that must be achieved, allowing each group to make cuts themselves as they saw best fit. Taveras cut his own paycheck by 10 percent, which garnered more support from the public and various public entities forced to reduce costs and services.
After speaking with the different unions, a series of changes rolled out over the next two years that turned around the financial catastrophe including:
- Public employees union cut pay by 1 percent and waived raises
- Firefighters increased healthcare co-shares and pensions for new workers
- Teachers agreed to a longer school day with less sick days
- Many public employees entered early retirement
- Seven tax-exempt nonprofits made voluntary payments to city coffers
- City Council raised property taxes by 6 percent
- Providence reduced pension liabilities by $170 million
- Public employee retirees older than 65 can be moved to private benefits and Medicare
Taveras said if the pension agreement was not approved by the state’s Superior Court, Providence would have likely filed for bankruptcy despite all other measures being agreed upon. The changes to pensions and retirement alone would make up for more than $22.5 million in the annual budget deficit.
The mayor of Gloucester pulled off a similar financial turnaround in 2008. Facing a $3.8 million cash deficit, Carolyn Kirk and her office worked to create a $4.8 million surplus through prudent cuts and sustainable changes to city operations.
By the end of 2013, Providence is expecting to report a $1 million budget surplus which is a far cry from threats of bankruptcy.
Avoid Bankruptcy At All Costs
Gov1 has kept track of bankruptcy scares across the country as well as instances when claims were filed such as in Detroit. For instance, many states are considering new strategies that would require state governmental bodies to step in when local governments are unable to turn around financial crises to avoid bankruptcies.