As the grand bargaining on a sweeping debt ceiling and deficit reduction bill comes to a close in Washington, the effects of years of overspending are still being felt around the country. For decades, states and cities have made financial promises they are unable to keep. The problem has largely been ignored until recently, when governments are simply running out of money, unable to mask the imbalance any longer.

Today, the New York Times profiles a small city in Rhode Island that has been forced to file for bankruptcy as its pension fund for retired police officers and firefighters dries up. The problem is so severe that measures to address the disparity between money coming in and going out are proving to be too little, too late.

The Times explains:

Even as officials in Washington pledged to cut domestic spending, the city of Central Falls, R.I., landed in bankruptcy court on Monday, a stark reminder that some American cities have debts so overwhelming that no amount of belt tightening can set things right.

Central Falls got into trouble, above all, by promising its police and firefighters generous retirement benefits without setting aside enough money to pay for them.

The conundrum of Central Falls in dealing with its debt is much like the one in Washington and Europe: how far to extend the principle of shared sacrifice, and how much pain, if any, to inflict on various stakeholders, including workers, retirees, taxpayers and investors.

“There were a lot of red flags raised,” said Ms. Canavan, a lifelong resident. Her pension is provided by the state, which is also contemplating changes to get its costs under control. “The whole issue is mismanagement of funds and spending beyond your means. In the private sector, smart people see it coming and make adjustments. If they don’t, they go under.”

This is a small-scale example of what is happening all around the country. Central Falls dug itself into a hole so deep, it couldn’t dig out. Fortunately it isn’t too late for our country, but we need to take swift and decisive action before it is. Congress must build on the cuts in the recent debt ceiling deal and enact the necessary spending reforms to allow the economic recovery to strengthen.

BA