Throughout history, it has been said that desperate times call for desperate measures …. While countless school districts around the country struggle to provide the same services with less money, Providence, Rhode Island took extreme measures last week when it announced that it would be handing out preemptive pink slips to all 1,926 teachers in the city school district.

According to Superintendent Tom Brady, quoted in the Providence Journal, “We are forced to take this precautionary action …. given the dire budget outline for the 2011-12 school year in which we are projecting a near $40 million deficit for the district.”

These notices were handed out in accordance with state law, which stipulates that teachers be informed of changes in their employment status by March 1.

This sweeping move will not result in a city full of students with no teachers. It simply means that the school board has the right to dismiss teachers as it deems appropriate, but not all teachers will be laid off at the end of the school year.

Michael Ross, CFA, Managing Director of Municipal Credit and Strategies at Morgan Keegan & Company, explains that cities and local government agencies – including school districts – in Rhode Island face a unique set of challenges. “For starters, the recession hit Rhode Island earlier than other states around the country,” he says. And because the state itself was feeling the pinch, it started reducing the amount of money it was able to funnel down to local governments and agencies.

In addition, Rhode Island municipalities and local government agencies are fairly restricted when it comes to revenue sources, which are basically limited to state aid and local property taxes.  “When both state aid and local property taxes are declining, challenges will arise.”

Providence fell victim to the real estate fallout, and has experienced a high foreclosure rate. In January 2011, 1 in 628 housing units in Providence received a foreclosure notice, according to RealtyTrac, which collects and aggregates foreclosure data from more than 2,200 counties.

“A declining tax base exerts pressure on assessed values, which is when cities usually call upon state aid to offset the loss,” says Ross. “Providence will have to find ways to “right-size” its school staffing to account for outmigration from the area -and to meet its financial challenges.”

Is this a move we can expect to see in other cities around the country? “The whole labor issue is becoming an increasingly hot topic, evidenced by the current events taking place in Wisconsin,” says a senior credit analyst with a major institutional investor.

The threat of more layoffs looms as a dark cloud over the horizon for many local governments and schools districts. Whether Providence’s move turns out to be an extreme action to address an extreme situation, or a strategy to spur union negotiations remains to be seen.