Sept. 23 (Bloomberg) -- The receiver for Central Falls, the Rhode Island city that declared bankruptcy last month, proposed a five-year plan for fiscal recovery that shields bondholders from losses while cutting benefits to retirees, imposing givebacks on unions and raising property taxes.
Pension benefits would shrink as much as 55 percent for some retirees under the plan proposed by Robert Flanders, a former state Supreme Court justice named to oversee the city. Other beneficiaries and most current members of city unions also would be required to pay 20 percent of their health-care premiums and forgo some cost-of-living increases under the plan.
“We will not give in to any temptation for one-time gimmicks or other short-term approaches that will simply push this crisis down the road,” Flanders told reporters at a City Hall briefing after submitting the plan yesterday to the U.S. bankruptcy court in Providence. “We are setting a new course.”
The proposal doesn’t require discounts or givebacks from the city’s bondholders, Flanders said. The plight of Central Falls, with about 18,000 residents 6 miles (10 kilometers) north of Providence, echoes imbalances that have dogged municipalities across the U.S. and has raised alarm in the Ocean State, where many public pensions are “considerably underfunded,” the state’s auditor-general said in a report last year.
Staving Off ‘Purgatory’
The Central Falls plan was designed to stave off “financial purgatory” for the city and state by “taking all steps necessary to protect access to municipal capital markets,” Flanders said. He was appointed receiver by the state earlier this year.
“I am hopeful that the bond market will be receptive to this plan, that it will serve as further proof that Rhode Island is taking the responsible course of action,” he said.
Central Falls has about $20.8 million in outstanding bonds, according to court documents and an Aug. 2 report from Moody’s Investors Service. Moody’s rates the city’s general-obligation debt Caa1, fifth lowest, and has it under review for a possible downgrade because of unfunded pensions, a lack of cash reserves and constraints on the revenue-raising ability of the state’s poorest city.
One of the city’s pension plans may run out of money for 56 beneficiaries next month without additional funding or concessions from current and retired workers, Moody’s said.
Flanders and state revenue officials said they sought $6 million in savings over five years to put the city’s $16 million annual budget in balance and to begin restoring investor confidence. The city has about $80 million in unfunded pension and benefits liabilities, the result of “years of unrealistic over-promising” by city officials, said Governor Lincoln Chafee.
Workers Bear Brunt
City workers and retirees bear the brunt of the cost-cutting in the plan presented by Flanders. He said that while unions have been negotiating “in a very cooperative mode,” he has “cram down” authority to impose cuts if unions reject them.
“No one whose pension is below $10,000 a year will take any kind of haircut as a result of these changes,” Flanders said. The cuts “are not happy numbers but taking these steps now will prevent even more Draconian changes,” he said.
Union officials and members will need time to study all the details before they can decide whether to accept the proposals, said J. Michael Downey, president of Rhode Island Council 94 of the American Federation State, County and Municipal Employees, which represents city workers.
“It’s the main position of our members to keep Central Falls as a thriving community,” Downey said yesterday. “But a 55 percent cut is extremely Draconian.”
Residents face the loss of a community center and some police and fire services. The city library, which lost its paid workers in July, already relies on volunteers to keep it open.
State Revenue Director Rosemary Booth Gallogly said she plans to call Moody’s and other credit-rating companies to assure them that “the earliest additional tax revenues would be used to pay for bonds and to show the credit markets that any kind of haircut was not part of the plan.”
“We don’t want Central Falls to become a contagion that spreads around the state,” Gallogly said at the briefing yesterday. “Uncertainty can sweep up and down the credit markets. We want to show very clearly that our priority is to pay these obligations.”
The case is In re City of Central Falls, 11-13105, U.S. Bankruptcy Court, District of Rhode Island (Providence).
To contact the reporter on this story: Tom Mashberg in Central Falls at Mashberg@rcn.com.
To contact the editors responsible for this story: Mark Tannenbaum at firstname.lastname@example.org.