Will This Teetering Northeastern City Be the Next Detroit?

Woonsocket, a Rhode Island city without the size, fame, and drama of Detroit but possessing an equally rich history and culture, has been facing a fiscal crisis that puts it on the verge of the same kind of bankruptcy the befell the Midwestern metropolis. Located in the northernmost part of our nation's tiniest state, Woonsocket borders Massachusetts and is about 15 miles from Providence and 50 miles from Boston. Incorporated in 1888, Woonsocket was once prominent in America for its booming textile industry. It also had a unique French-Canadian heritage (French is still used on the streets). Like how the car industry's decline led to Detroit's undoing, de-industrialization swept Woonsocket and its population diminished since the 1950s. A commentator called it "Rhode Island's little Detroit," and Woonsocket struggles to bear its unsustainable liabilities that reached almost 20% of its property-tax base and include $210.5 million in debt.

Woonsocket was arguably hit much harder by the Great Recession than most places in the country. The unemployment rate of the city is at 11.2%, and deplorably a third of people in Woonsocket must use food stamps for subsistence. In addition, the dilapidation of buildings emblematic of Detroit's fall, which was poignantly illustrated by photos collected by PolicyMic's Nicholas Demas, has been appearing in Woonsocket as well.

The cuts in state aid and pension shortfalls put the municipal government on the brink of a fiscal abyss last year, triggering state intervention. The state appointed a budget commission which developed a five-year plan to salvage Woonsocket. The plan slashes health and retirement benefits for city employees and imposes a "supplemental tax" on real estate and automobiles, promising to save $8.1 million in total. Mayor Leo Fontaine proclaimed last month that it would steer the city away from a looming bankruptcy.

But the implementation of this plan may not take place smoothly, as a protest group has threatened to mount legal challenges against the tax increases. Furthermore, it remains a question whether the plan will succeed even if implemented in full. After the plan was adopted, Moody's still rated the city's bond as B3, meaning it is regarded as a "junk bond" that a bank cannot even legally purchase, and gave a "negative outlook" for Woonsocket, citing "challenges that the city faces in implementing" deficit reduction. But another bond rating agency, Fitch, was more optimistic about the steps Woonsocket has taken to shore up its finances and changed its outlook to "stable."

A property tax increase amidst difficult times is a hard choice that must be made to pull the city out of its quagmire. However it must be understood as a temporary solution, as an excessive tax burden may slowly drive homeowners away from the city. Something also must be done to ensure pensions are sustainable. In 2002 Woonsocket started extensively borrowing to pay pensions, partially leading to more indebtedness. 

Nevertheless, the focus on cutting health benefits for employees and retirees in order to save a government from bankruptcy is not appropriate. From what I can read on the city's 2014 budget, health benefit and life insurance expenditures ($8.4 million) are only 6.6% of the total city spending ($127 million). The deficit reduction plan Woonsocket adopted did not at all explore cutting costs in the city's day-to-day functions in different departments. For example, the $8 million police budget actually increased from 2013, while the fire department received cuts of less than $1 million. The libertarian-leaning Mercatus Center at George Mason University recommended that Rhode Island cities carry out cuts in police and fire departments. The city should devise ways to make its services more cost-efficient and eliminate waste, instead of plundering from health-care benefits whenever it wants to save money. Even a sequestration-like series of across-the-board cuts would be comparatively fairer, as no department should be considered a sacred cow at the expense of other services. When a surplus is eventually realized in the city, the city should remember lessons learned and save up enough in a rainy day fund for unforeseen crises.

Woonsocket also suffers from a problem endemic to the state of Rhode Island: over-regulation. Even with its sore need to attract businesses, it seems the state is often unable to modestly loosen its regulatory grip. Woonsocket City Council rejected legalization of chicken-keeping, while Providence would not allow a store to open nearly 24 hours. The Mercatus Center rated the state very low on economic and regulatory freedom. The neighboring Massachusetts is ranked higher, and Massachusetts suffered the impact of recession far less than Rhode Island — plus its cities and bounced back much quicker. This does not mean less regulation is always better. After all Massachusetts, which has performed better than the national average economically, was not ranked anywhere near the top by Mercatus. Rather it simply means sometimes it is obvious in places like Rhode Island that modest relaxation of regulations is needed.

Woonsocket's history and heritage should enable the city to encourage development of the tourism industry. Having more investment in this arena will be beneficial, and one thing it can do would be to incentivize transportation companies like Peter Pan to set up stops in Woonsocket connecting it to major nearby cities such as Boston. 

The fates of Detroit and Woonsocket give a stern warning for local governments across the country to pay attention to both economic development and fiscal sustainability in their jurisdiction, and not scramble for desperate measures when something goes very wrong. After the recession, it will benefit cities in the long run if they will study successes and failures of their neighbors and come up with fiscal survival strategies suitable to their local circumstances.