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Friday, May 21, 2010

Has First Public Sector Union Domino Fallen?

There is a legal and political drama unfolding in Central Falls, Rhode Island, which has national implications for municipalities suffocating under union contracts and pension obligations, but which has received little attention outside Rhode Island.

As I posted two days ago, the City of Central Falls (whose slogan is "A City With a Bright Future") filed for receivership, the state equivalent of bankruptcy. Rhode Island law does not allow a municipality to file for federal bankruptcy protection, but provides the state receivership alternative.

A temporary receiver was appointed by Rhode Island Superior Court Justice Michael Silverstein, an experienced business lawyer and well-regarded judge.

The Petition (embedded below) for appointment of a receiver details the financial problems, and highlights two items, pensions and union contracts.

First, Central Falls' "actuarial accrued liability" for pensions exceeds $35 million, but there are only $4 million in assets. The annual contribution required by the actuaries for 2009 was $2.7 million, of which the City actually contributed $0. No funds are available for 2010 contributions.

Second, of the $18 million budget, $6.5 million is for employees with collective bargaining agreements. According to The Providence Journal, "City Solicitor John T. Gannon said the city is in the middle of all its municipal employee union contracts. Mayor Charles D. Moreau has been trying to negotiate concessions, he said, but without success."

The implications of the Central Falls receivership are enormous. Under receivership, the receiver has the power to modify all contracts, including union contracts.

Central Falls could be the first union domino to fall, as municipalities see receivership (or bankruptcy, if permitted by state law) as the only viable option to escape unsustainable union contracts. As reported in The Providence Journal (emphasis mine):

“You have just seen the future,” said state Rep. Laurence W. Erhardt, R-North Kingstown. “The very fact that you opened the door to say it is a possibility, a couple other communities may not be far behind.”

While receivership does long-term damage to a city’s bond rating, the move also gives the receiver — named Wednesday was local attorney Jonathan N. Savage — unique power to modify union contracts and other debts.

“You’re getting rid of all the problems that have been created for generations, just by filing for receivership,” said Warwick Mayor Scott Avedisian, adding that he would never support the move for his city. “If you can wipe out an entire generation of contracts, and if Central Falls gets away with that, then what would be the incentive for other communities not to do the same?”

AFL-CIO secretary-treasurer Maureen Martin said a domino effect could be “devastating.”

Expect the court battle -- and the negotiations with the unions -- to be intense, because the stakes are so high. A court hearing is scheduled for June 9 as to whether the temporary receivership will be made permanent.

I will be following this case and will keep you posted.

Central Falls, Rhode Island, Petition for Appointment of Receiver

Update 6-14-2010: Unions Rescued In Rhode Island

Related Posts:
Rhode Island City Files For Receivership
Dem. Legislator Files Arizona-Like Immigration Bill in Rhode Island
Unions Pushing States Toward Broken Promises

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  1. I can think of several nations whose citizens might benefit from Unions, but here they seem out of date, out of touch and pretty much useless. If Union leadership really had altruistic goals, they would take up residence in China, N. Korea and the Middle East.

  2. Unions played a valuable role in improving working conditions and pay for manufacturing workers last century. But when the unions over-reached and the compensation and benefit costs of the unionized workforce made the manufacturer's products uncompetitive, then consumers could find a comparable but cheaper substitute product. As the manufacturer's financial condition deteriorated, the bargaining power shifted to his favor and he could get concessions from labor to make the business competitive again.

    Governemnts, on the other hand, are monopolies. There are no market forces to make governments do what they do more competitively. So there are few incentives for government union employees to work more competitively.

    When government union contracts are re-negotiated, who has skin in the game to ensure the taxpayers are adequately represented? The traditional adversarial role at the bargaining table between management vs labor appears to be missing. I assume a government supervisor (whose salary is paid by taxpayers) negotiates with a representative of the union (whose members compensation is paid by taxpayers).

    So the taxpayer essentially negotiates against itself. That's perverse, and the taxpayer gets fleeced.

  3. It seems wrong for a municipality to inflict a state of perpetual indebtedness on the citizenry.

    Why not simply contract for the services required at the prevailing market rate, and allow the companies involved (and their unions)to make provisions for retirement, insurance, and the like?

    Competition would keep these costs in line, and, as the financial situation changes, so would the city be able to manage the ebb and flow of tax dollars.