Rhode Isl. city bankruptcy may be lesson- official

Thu Aug 4, 2011 11:02pm EDT

Related Topics

* Municipal bankruptcies expected to become more common

* Retirees will start seeing smaller pension checks soon

By Edith Honan

CENTRAL FALLS, Rhode Island, Aug 4 (Reuters) - A bankruptcy filing this week by Central Falls, Rhode Island, could be a lesson for other struggling U.S. cities in the advantages of taking that drastic legal step, the city's receiver said in an interview on Thursday.

Robert Flanders, a retired judge who took control of the city in January, said he believes the city of 19,000 can emerge from bankruptcy within a year without freezing itself out of the municipal debt market or putting other Rhode Island cities at risk of the same fate.

"Let's face it: this receivership is undemocratic in the sense that the elected officials have all been shunted aside and this outsider is coming in and doing things that may make fiscal sense but may not ... be what the elected officials might want to do," he told Reuters.

Cities and counties across the country are grappling with huge budget shortfalls, and some analysts have suggested that bankruptcy filings could become more common. Some, like Central Falls, have been brought to their knees by pension costs that have ballooned to amounts that top their ability to pay.

In Central Falls, which has been under state control for over a year, the mayor and city council have had no formal role as the receiver has worked to develop a rescue plan, including seeking concessions from stakeholders like public sector unions.

On Monday, Flanders said the city had filed for Chapter 9 municipal bankruptcy, citing its $80 million unfunded pension and retiree health benefit liability that is more than four times its annual budget of $17 million.

The move came after most retired municipal workers, including police and firefighters, either declined or didn't respond to what Flanders had called the "Big Ask" -- a drop in pension payments by as much as 50 percent.

Now, certain changes can be made unilaterally, he said.

"Once the bankruptcy is filed, on Day One the receiver can slash pensions, blow up collective bargaining agreements and begin to implement the changes that are needed to effectuate the financial reforms that are needed without having to get anyone's OK," he said.

The filing came as Alabama's Jefferson County weighs a Chapter 9 filing, which would make it the biggest municipal bankruptcy in U.S. history [ID:nN1E77316U], and the Pennsylvania state capital of Harrisburg also considers the option.

NEW LAW

One factor that sets Rhode Island apart is a new law designed to prevent scaring the municipal bond market away from Rhode Island bonds and preventing other cities in the state -- some of which are considered distressed -- from also going bankrupt.

The law guarantees bondholders will be paid before a distressed city deals with its other obligations.

Those who caution against municipal bankruptcy often cite Vallejo, California, where a Chapter 9 filing three years ago proved expensive and time-consuming.

Central Falls could be the anti-Vallejo, said Flanders, adding he aims to wrap up the legal process in a matter of months.

Whatever the case, the filing will mean painful cuts, especially to retired municipal workers, many of whom will begin seeing their pensions cut by half or a third next month.

"None of this is fair. Fairness and justice are in the afterlife," said Flanders. "But we only have so much to go around."

Meanwhile, police union president Daniel Barzykowski said financial pain was falling unfairly on municipal workers like police.

"Morale is tough right now," he said. "I tell my guys all the time that I want them to keep their heads straight when they're out on the street because you can't put a price tag on someone's safety." (Editing by Eric Walsh)

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