A Touch of Chicken or Egg? - Does State Intervention Accelerate Municipal Receivership?

Last week, the state escalated its involvement in East Providence's budget problems by putting in a Budget Commission. It did so only one month after sending in a Fiscal Overseer. Observers have correctly pointed out that this was three full months earlier than called for by the procedure outlined in the so-called Fiscal Stability Act of 2010.

This action, of course, followed upon Moodys' downgrading of East Providence bonds to junk status. In fact, the timing was so perfect - just days apart - that one wonders if the Moodys' downgrade precipitated the state's accelerated action.

What we don't have to wonder about is one of the factors that was specifically cited by Moody's for their further downgrade.

“The downgrade reflects the city’s ongoing financial strain, compounded by the growing accumulated deficit in the school unrestricted fund; a heavy reliance on cash flow borrowing; and increasing fixed costs related to pension and OPEB [other post employment benefits] liabilities,” reads the summary rationale of Moody’s report.

“The downgrade also incorporates the recent appointment of a fiscal overseer by the state, which signals the severity of the city’s fiscal challenges.”

So the state accelerates its intervention after Moodys downgrades EP bonds the second time. And Moody's had downgraded the second time in part because of the state's initial step of intervention.

The effect? With this second downgrade by Moodys, the city's ability to borrow on reasonable terms has been substantially hindered, further exacerbating its cash flow and overall fiscal issues.

No doubt, East Providence started out with serious problems. One term of good government by the Carcieri/Larisa/Cusack crowd was not going to solve the fiscal problems generated by decades of union puppet rule. So the state has not flexed the so-called Fiscal Stability Act in EP solely as a giddy exercise of power.

At the same time, the state needs to tread more carefully. There are clear indications with the East Providence experience that the state, in stepping in under the Fiscal Stability Act, not only contributed to a vicious circle but possibly accelerated a downward spiral. This would certainly contradict both the name and the intent of the law under which the state took action.