Robert Cushman: Unfunded Liabilities, Warwick’s “Subprime” Crisis
A few years ago, the dream of owning a home and planning for a comfortable retirement wasn’t just a promise–it was guaranteed. A growing economy was fueling a new “ownership society”. We were told to invest, take a chance, buy a home, and don’t worry about the risk it will all work out.
What happened? Today the stock market is below 7,000 points, after experiencing a high in the 14,000 point range. Home foreclosures are at record levels, the value of our homes have dwindled, our 401Ks and other investments have suffered significant losses. The promises were false and the dreams have vanished, thanks in large part to the irresponsible action of the so-called “Masters of the Universe” on Wall Street. Our economy is in meltdown mode and taxpayers on the hook for trillions of dollars in losses. How could this happen? Where were the warnings?
During the years of irrational exuberance, a few individuals at the country’s largest financial firms warned of the consequences of providing loans based on faulty consumer information. They raised the alarm that some of the mortgages being offered would be difficult for borrowers to repay and they called for responsible assessments of risk. But where were the government leaders to protect us–to watch our tax dollars, protect our future and our children’s future?
Subprime mortgages were fueled by mortgage brokers and bankers who were happy to keep writing mortgages as long as they were being bought up, chopped up and resold by Wall Street financial institutions in the form of mortgage backed securities. The risk of default was someone else’s problem.
Today you and I, the taxpayers of the United States, are sacrificing our hard-earned tax dollars to rectify these false assumptions. If Warwick’s Mayor Avedisian assumptions regarding recent contract extensions with municipal employees prove to be false, will Warwick taxpayers be asked to make the same sacrifice?
With the city’s unfunded pension liability at $200 million before the market crash, why would city leaders promise to increase municipal employee pension benefits without demanding current actuarial reports to determine pension valuations based on market conditions? With the unprecedented crash in the financial markets, Warwick’s pensions have lost more then 30% of their value and the unfunded liability has grown substantially. But apparently believing that ignorance is bliss, the Avedisian administration is cheerfully using 2006 actuarial numbers to determine how much employees will pay for the increased pension benefits being granted in these future contracts. Just as subprime mortgage lenders used faulty information and unrealistic assumptions in granting reckless loans, the Avedisian administration is committing taxpayer dollars with no clue as to the real consequences of their action. If future pension shortfalls occur, municipal employees are indemnified from the risk and they will receive the enhanced benefits they have been promised by the Mayor. It will be Warwick taxpayers once again stuck with paying the bill for any future liability.
Shockingly, Mayor Avedisian also is taking $500,000 budgeted to city pensions to help balance this year’s operating budget based on the same antiquated information. Can we continue to underfund these future obligations? Are we being fair to future retirees, if we can’t afford to pay their promised benefits?
Although they have been labeled as savings by the administration to promote ratification of these contracts, the city is deferring almost $2 million more in employee holiday pay and uniform allowances. No matter how it is spun, a deferred expense without a plan to fund it, is nothing more then another unfunded liability.
The unfunded health care liability in Warwick is $365 million. These contract provisions promise employees a fixed rate healthcare co-pay of $14 per week for individuals and $28 per week for families. The city council chose to approve these fixed rates, guaranteeing that taxpayers will pay 100% of any increase in health care costs for the next three years, another unfunded liability that will draw more and more tax dollars away from other vital programs in the city.
Warwick’s unfunded pension and healthcare liabilities are approaching $650 million. That equates to about $7,500 in debt for every man, woman and child living in the city. The time will come when these liabilities will have to be paid.
Already we are seeing financial conditions in the city deteriorate, a dangerously low surplus, frozen bond money, school building in disrepair and crumbling infrastructure. Can we continue to ignore the risks associated with making more and more costly promises, creating more and more obligations, deferring more and more expenses and sinking deeper and deeper into debt? How much longer can taxpayers sustain new tax increases, cuts in city services, and deferred improvements to school buildings and city streets? What impact will these IOU’s have on our children’s future and the promises we have made them?
Like the subprime homeowner unable to afford their mortgage, will we soon be viewing a field of broken promises in Warwick and see the dreams for our children shattered and be left wondering, why anyone didn’t warn us this was coming?
Robert Cushman is a former Warwick City Councilman and former Chairman of the Warwick School Committee.