Aug. 2 (Bloomberg) -- Central Falls, Rhode Island, whose motto is “a city with a bright future,” has cast a shadow across the rest of the state by entering bankruptcy.
Rhode Island’s poorest city sought court protection yesterday after retirees failed to accept cuts in pensions and benefits. That pushed the municipality into insolvency, according to Robert Flanders, a former state Supreme Court justice named to oversee Central Falls finances earlier this year. The city asked the court to let it impose “a prudent plan” to adjust what it pays retired workers.
The city’s plight echoes imbalances found in other municipalities across the U.S., including Vallejo, California, and Harrisburg, Pennsylvania, where local governments failed to curb spending to fit shrinking economies. In Rhode Island, the move into court is sounding an alarm because many local pension plans are “considerably underfunded,” the state’s auditor-general said in a report last year.
“Unless there’s pension reform, Central Falls may not be the last municipality in Rhode Island that faces bankruptcy,” said Gary Sasse, former Governor Donald Carcieri’s chief of administration. “No question Central Falls was unique and was an economic basket case but there are other communities in the state with locally administered pension plans that are in serious trouble.”
Fifth Municipal Bankruptcy
Central Falls, a city of about 18,000 about 6 miles (9.7 kilometers) north of Providence, became the fifth U.S. community to enter bankruptcy this year, compared with six in 2010, according to data compiled by Bloomberg. Commissioners from Jefferson County, Alabama, last week postponed a vote on what would be the biggest U.S. municipal bankruptcy, while Harrisburg has flirted with such a move since last year. Vallejo’s plan to exit bankruptcy won approval last week. It entered court protection in May 2008.
The Rhode Island city’s pension plan is expected to run out of assets by October without additional funding or significant concessions from both current workers and retirees, Moody’s Investors Service said in a June 17 report. The rating company today put Central Falls general obligation bonds on review for a possible downgrade after reducing its credit mark one level to Caa1, the fifth-lowest, from B3 in June. Both are below investment grade.
“I still can’t understand why a city this size can’t run on $15 or $17 million,” said Jerauld Adams, 41, chairman of the Board of Trustees of Adams Library, which volunteers keep open three days a week after Flanders fired all the paid workers on July 1. “And they don’t even have to take care of their own school system.”
Central Falls’s economy began to decline in the 1970s with the departure of manufacturers including textile makers from Providence north to the Massachusetts line. At least 11 textile plants closed from 1997 through 2009, eliminating almost 1,400 jobs, among them the 280 at the city’s Elizabeth Webbing Mills, National Council of Textile Organizations data show.
The city’s demographics also changed with an influx of people from Latin America including Mexico and Colombia, as well as from Puerto Rico and Portugal. By 2000, the population was almost half Hispanic, according to U.S. Census Bureau data. By 2010, that ratio had risen to about 60 percent.
Crime increased with the city’s economic decline. In 1986, the smallest, most densely populated city in Rhode Island was crowned the Cocaine Capital of New England in a Rolling Stone magazine article.
By the early 1990s, the state had taken over the city’s schools, including 100 percent of the funding. The march toward bankruptcy began in the past few years as Rhode Island slashed local aid to cope with the financial crisis and the recession it spawned, said state Senator Elizabeth Crowley, a Central Falls Democrat.
The city has about $21 million of debt outstanding, New York-based Moody’s said. Per-capita income in Central Falls is 50 percent of the Rhode Island average, the company said. Bondholders may have the most protection in the bankruptcy filing because a new state law gives them a “priority lien” on city revenue, according to Moody’s.
While “the legislation obliges cities, towns and districts to dedicate property taxes and other general revenues to pay debt service before any other claims or payments,” Moody’s said in a statement today, “it is unclear how the federal court will treat the tenets of this new law in a bankruptcy proceeding.”
The City Council in May 2010 sought a state-appointed receiver. Flanders, who was named to the post this year, cut costs yet needed contract concessions on pensions and other benefits because the city, often through outside arbitrators, had promised more than it could afford to police and firefighters, many of who retire early.
The city had “no option” except seeking Chapter 9 bankruptcy protection, according to court papers.
“The city’s financial condition has deteriorated to the point where it is insolvent,” Flanders said in the filing. “The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased.”
Central Falls has a structural budget deficit of about $5.6 million on an annual general-fund budget of about $16.4 million, according to court papers. By Aug. 31, the city won’t be able to pay its bills, the filing said. It also has an unfunded liability of about $80 million for pensions and other post-employment benefits after the city failed to make regular contributions for its workers, Flanders said.
“You could say it’s not fair because all of us have contributed to the pension plan for our whole careers on good faith,” said John Garvey, the city’s acting fire chief who has worked for the department for 25 years. “We had to, there was no choice, we had to contribute. Now part of it is not going to be there.”
Crowley, the state senator who is a former Central Falls city clerk, says going bankrupt isn’t fair to retirees. “There’s nobody getting rich on pensions in this city,” she said in a telephone interview.
The community’s financial difficulties “are much bigger” than the cost of labor and benefits, Marc Gursky, a lawyer for the firefighters union, said by telephone. The city should also be negotiating with 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.
Yet there is little sympathy on the streets of Central Falls for the city’s 141 retirees. Last week, they had a chance to vote on accepting the receiver’s plan to slash benefits for some by as much as half, and now face the reductions anyway if the court approves. Just two of the 141 accepted the cuts.
“They’re just fat cats collecting money,” said Rob Choquette, who was part of a three-man construction crew working in the city center yesterday. “I have the threat of getting injured every day and no pension waiting for me.”
Rhode Island’s auditor general said in a report last year that 24 municipal pension plans in the state have less than 45 percent of the assets they need to meet their obligations, largely because they haven’t made required payments. State Treasurer Gina Raimondo and Governor Lincoln Chafee, an independent, have pledged to deliver proposals to the Democratic-controlled Legislature in coming months to overhaul public pensions.
The state is already working with North Providence and Woonsocket because they needed formal authorization to use deficit financing to close budget gaps, and has been informally consulting with Providence and Pawtucket, which neighbors Central Falls, according to Rosemary Booth Gallogly, the head of the state’s revenue department.
“I don’t see anybody at this stage that is at that level,” she said, referring to the Central Falls bankruptcy. Yet, she added, “when you look at the unfunded pensions, that is a reason to be concerned.”
The case is In re City of Central Falls, 11-13105, U.S. Bankruptcy Court, District of Rhode Island (Providence).
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