‘Dire’ Fiscal State Forces Rhode Island City Into Bankruptcy

Central Falls Rhode Island Bankruptcy
Retired firefighters Rick McDermott, left, and Paul St. George, right, react as the city announces that it will file for Chapter 9 bankruptcy protection in Central Falls, Rhode Island on Aug. 1, 2011. Photographer: Stew Milne/AP

Central Falls, Rhode Island’s poorest city, sought Chapter 9 bankruptcy protection as it struggles to meet pension obligations.

A petition was filed today after state officials failed to persuade police, fire and municipal employee unions to accept concessions and to get retirees to agree to lower benefits, according to a statement from Robert Flanders, a former state Supreme Court justice named to oversee the city’s finances. The city asked the court to permit the rejection of union contracts.

“The current situation is dire, and necessitates decisive steps to put the city back on a path to solid financial footing and future prosperity,” Governor Lincoln Chafee, an independent who joined Flanders in announcing the move today, said in the statement.

Central Falls, a city of about 18,000 located about 6 miles (9.7 kilometers) north of Providence, is the fifth municipality to enter bankruptcy this year, compared with six in all of 2010, according to data compiled by Bloomberg. The filing followed last week’s move by lawmakers in Jefferson County, Alabama, to postpone a vote on proceeding with what would be the biggest U.S. municipal bankruptcy.

Out of Assets

The Central Falls pension plan was expected to run out of assets by October without additional funding or significant concessions from both current employees and retirees, according to a June 17 report from Moody’s Investors Service. The rating company at the time lowered the city’s credit mark one level to Caa1, fifth lowest, from B3. Both are below investment grade.

The city had “no option” except seeking Chapter 9 protection after service cuts and the unsuccessful effort to curb labor and retiree costs, it said in court papers. A “substantial majority” of city spending is tied to employment, and because of pending salary increases called for under contracts, those costs are set to rise, according to court documents.

“The city’s financial condition has deteriorated to the point where it is insolvent,” Flanders said in the court filing. “The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased.”

Structural Deficit

Central Falls has a structural deficit of about $5 million on an annual budget of about $16.4 million, according to court papers. By Aug. 31, the city won’t have enough revenue to pay its bills, the filing said.

The city’s financial difficulties “are much bigger” than the cost of labor and benefits, Marc Gursky, a lawyer for the firefighters union, said in a telephone interview. The city should be negotiating with workers, bondholders and the state to come up with a solution, he said.

“Firefighters or police or a handful of workers at City Hall aren’t going to be able to solve the city’s problems,” Gursky said.

Flanders, 62, a partner at Hinckley Allen Snyder LLP in Providence who was appointed state receiver by Chafee, said he will submit a reorganization and recovery plan to the court in the next 30 days. The lawyer, who retired from the state’s high court in 2004, had sought to cut half the benefits of retirees to save $2.5 million this year. He also planned to find another $2.5 million of government savings to balance the city’s budget.

‘Hopeful Day’

“This is actually a hopeful day for the city because finally they can move forward to get to a place where they can exist as a standalone city or merge or consolidate with one of their neighbors without these crushing debt burdens,” Flanders said in a telephone interview.

Last week, 141 retirees failed to meet a deadline to vote on the concessions sought by Flanders. Central Falls has $80 million in unfunded liabilities for pensions and retiree benefits, Flanders said. He said the city retirement plan has just $5 million in assets.

The city also has about $21 million of debt outstanding, New York-based Moody’s said. The city’s per-capita income is 50 percent of the Rhode Island average, according to the company.

The bankruptcy isn’t expected “to hinder the state’s ability to access the bond markets in the coming months,” Gina Raimondo, the state treasurer, said in a statement.

Frank Bailey, a U.S. Bankruptcy Court judge in Boston, will oversee the case, according to a court filing.

The case is In re City of Central Falls, 11-13105, U.S. Bankruptcy Court, District of Rhode Island (Providence).

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