What Rhode Islanders Need To Know About the Crisis in Central Coventry, Part 1

1. Rhode Island Superior Court Judge Brian Stern’s order liquidating the Central Coventry Fire District is based on the premises that…

• There is no doubt that the district is bankrupt in any meaningful financial sense of the term, and

• Over the course of several votes, Central Coventry voters have rejected plans that would at least temporarily keep the bankrupt district running.

In a little more detail, in February of 2013, Central Coventry voters rejected a $5.4M dollar levy prepared by the district’s “Special Master”, i.e. the official appointed by the Court because of the impending bankruptcy, by a vote of 228 to 204. A month later, they rejected a $5.1M levy by a significantly larger margin, 1337 to 484. (The source for this information is Judge Stern’s liquidation order, which contains a very readable narrative of the events leading to liquidation).

After the rejection of the two levies, the General Assembly intervened in various stages, rewriting state law so that in cases where no fire-levy is approved, the previous year’s levy is automatically assessed. In response, Central Coventry voters eventually voted, 757 to 136, to approve a fire district levy of $4.9M, when a rejection would have put a $5.3M levy automatically into place. (Source: Coventry patch).

Judge Stern summarized the outcome…

On October 21, 2013, the Central Coventry Fire District taxpayers were presented with a budget that was less than needed to satisfy the costs of operations, personnel, and repayment of the fire district’s accrued debt. The money that the fire district’s board needed to meet all of these obligations was as much as slightly over $7 million. Four days before this meeting, on October 17, 2013 the board explicitly found unanimously through a roll call vote that if the voters rejected the board’s tax-levy and assessment, the board would recommend to the Court to liquidate the fire district’s assets and close the fire district.

This Court finds the voters knew full well what was at stake for the future of their fire district at this crucial vote, and yet they passed a budget that was less than required to balance the books, if a suitable agreement could not be reached. The fire district voters, by failing to vote for a balanced budget or at least a budget equal to that in the legislation, effectively voted for liquidation and dissolution.

2. The Central Coventry Fire District is facing two separate fiscal problems, resulting from distinct forms of bad management by the previously elected board of directors (which was replaced with a new Board in mid-2013, assisted by a shove from Judge Stern and the Special Master). Judge Stern’s order cites an annual $800,000 undercollection of revenue that began in FY2011, resulting from a tax bill error involving a “single large property owner”, that was repeated for two years. Despite the fact the district was $1.6M short in terms of actual revenue collected, the board spent the entire amount originally budgeted.

But the billing error is not the entirety of Central Coventry’s fiscal problem. The other half of the problem is that costs have substantially gone up. Describing the actions of the previous board, Judge Stern says…

Despite the massive structural deficit that had been running for two years, the board increased the fire district’s expenditures. The board hired additional firefighters, leased a new ladder truck, and entered into a new collective bargaining agreement increasing firefighters’ rate of pay, as well as accruing other benefits. Still, the taxpayers were not informed of the structural deficit. Having no revenue or tax proceeds to pay the bills, the board resorted to what has been quintessentially the 21st-century American thing to do. It took out a loan from a credit line with Centerville Bank, to pay operating expenses and it cut corners on its obligations to employees. Specifically, the board failed to remit employee contributions withheld from their pay to the Municipal Employees Retirement System, and it failed to pay bills as they became due, including the health insurance premiums for the employees.

3. So the discussion about what debt will be owed, if the Central Coventry Fire district is liquidated, basically breaks down into three parts.

• Approximately $1.6M for operating costs that were already spent, above what was actually collected, because of the billing error.

• Another $5 million+ that the union claims they will be owed, to pay out a remaining year on their contract, regardless of whether the Fire District is liquidated or not (I suspect this would go to court, if the liquidation continues), and

• Additional money, in the millions of dollars, to pay out various other long-term debts that the district fell behind on, mainly pension system contributions. This debt has to be dealt with, in some form or another, whether the district is liquidated or not.

4. What would it take to fix this all, in the absence of a major “restructuring” of some kind? Quoting Judge Stern one more time…

The yearly operating expenses of the fire district were far in excess of the amount of funds that was being generated by taxes and other fees. The board had created what can only be described as an elaborate Ponzi scheme to hide this from the taxpayers, which resulted in a multimillion dollar structural deficit. A twenty, thirty, or even a fifty percent increase in taxes would not even resolve the entire structural deficit the board had created at the time.

5. Trying to piece together a budget history of the Central Coventry fire district is a bit of a challenge. Here’s the best information I was able to piece together from dryly neutral sources (including the Special Master)…

A. The Rhode Island municipal finance office issued its report on Rhode Island fire districts this past March, with district-by-district levy information for fiscal years 2012 and 2013. The levy totals listed for Central Coventry are $5.1M for FY2012 and $4.9M for FY2013.

B. The Special master prepared a budget in January of 2013 that reported $4.6M of the tax levy collected in FY2012, and 300K in delinquent revenue expected to be collected in the next year, to be added to a $5.4M levy in 2013. This is, presumably, the levy that was rejected in the February 2013 vote.

C. The Special Master’s documents make clear that the CCFD has a second significant source of revenue; they annually collect in the vicinity of $600K to $700K in “rescue run recovery” charges.  Operating budgets are usually about this much more than the tax levy.

D. An earlier budget that had been prepared by the Special Master lists an “actual” number for FY2011 of $4.8M in tax-levy revenue (not including “rescue run recovery”), this being the first year of the $800K mistake.

E. Moving to a less-official source, a RIPEC report with data on fire districts lists a $4.1M levy for the CCFD in FY2010, but a $5.1M levy for FY2011 (which does not match the either the Special Master’s number or the Special Master’s number minus $800K for FY2011).

F. Finally, there’s an older fire district report available online from the municipal finance office that makes for an interesting baseline. It lists a levy of $3.3M for Central Coventry “as of 12/31/05”. Coming full circle, that would be about a 60% levy increase (using the $5.4M total rejected in the first vote) over an 8 or 9 year period.

What is not in dispute is that the district cannot operate on its current budget.  State Representative Patricia Morgan has claimed in public forums that the CCFD firefighters have had a “37% increase in compensation in the past three years”,  and that this is a major factor in forcing the district’s fiscal crisis. The firefighters’ union disputes this claim, but does not deny that budget increases are necessary because of other operating costs (in addition to resolving the “billing error”)…

[Chief Andrew Baynes] said the fire district had been funded at about $5.5 million a year for the past three years, with a tax rate of $1.82 per thousand of assessed valuation. [Union President David Gorman] said being level-funded ignores the reality of increasing costs for fuel, equipment and other expenses. (Source: Andy Smith, Providence Journal, October 13, 2013)

Part 2: Two solutions have been put on the table, with a third in the offing…

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