Central Falls, Rhode Island, took a big step toward exiting bankruptcy on Thursday when a judge signed off on a plan that balances the impoverished city's budget for the next five years by hiking taxes, cutting employees and pensions and revising labor contracts.
The case has garnered attention for its treatment of the city's bondholders, who remain unscathed while pensioners took a huge hit, in contrast with some other recent U.S. municipal bankruptcies.
The quick resolution of Central Falls' bankruptcy, filed in August 2011, may be one for the record books.
"In my limited knowledge, this case is the fastest case in the history of Chapter 9... to go from filing to confirmation. It's a record time and a record efficiency," Judge Frank Bailey said from the bench. "I think that this is an example for not only Rhode Island but maybe the nation on how to run a Chapter 9."
Central Falls and several other local governments across the United States have sought refuge in bankruptcy court in recent years as sinking revenue in the wake of the economic recession, escalating pension costs and big debt loads have stretched their budgets to the brink.
Bailey confirmed the debt adjustment plan in U.S. Bankruptcy Court for the District of Rhode Island. No creditors objected to the plan, and only two of 237 creditors eligible to vote on the plan cast ballots against it.
Key elements of the plan - new collective bargaining agreements with public employee unions and cuts to pension and healthcare benefits - were the result of settlement agreements with workers and retirees, instead of lawsuits.
In response to Central Falls' impending insolvency, Rhode Island passed a law giving bondholders a lien on property tax revenue and ensuring they continue to be paid in a municipal bankruptcy.
With confirmation of the plan, the city's state-appointed receiver can now dispute some claims and begin paying out others. Some unsecured creditors could receive a payment by December 31.
While elected officials are supposed to regain control of the city as early as January, they will have to certify to the court and the state's revenue department that they are abiding by the receiver's financial plan.
If they stray from the plan, the court, which will retain jurisdiction, could force their hand. The court will also hold an annual status conference on the city's progress.
PLAN BALANCES BUDGET BUT CAUSES PAIN
Central Falls entered bankruptcy with revenues of about $16 million and a structural deficit of more than $6 million. In bankruptcy, the receiver's staff devised a plan that balances the budget through 2017 by raising property taxes by about 4 percent each year.
Mayor Charles Moreau also started cutting positions after asking for a judicial receiver in May 2010, when the city had 174 employees. The city now has a work force of 116.
The mayor and city council members were rendered powerless under state receivership and bankruptcy. The city was also forced to shutter its only community center and temporarily close its library before reopening it under nonprofit management.
Many of the city's 133 retirees are still angry over how they were treated. Their already modest annual pensions, which averaged $26,700 before the bankruptcy, were slashed by up to 55 percent.
The state allocated an extra $2.6 million to provide some relief and restore payments to about 75 percent of their original value for five years.
"If no actions were taken the pension plans would have simply run out of money," Theodore Orson, the lawyer for the state-appointed receiver overseeing the city, said in court.
The plan also calls for unsecured creditors - including vendors with outstanding bills - to be paid up to 45 percent of their claims in installments from a pool of $600,000. If any money remains after allowed claims are paid, it will go back into the city's capital account.
An attorney representing some city council members expressed concerns about the feasibility of the plan and the methods for restoring local control, but Bailey overruled them.
"It's my sincere hope that given the confirmation of this plan of adjustment that the parties will be able to join together now in a healing process with a healthy financial community," the judge told the courtroom.
(Reporting by Hilary Russ; editing by Sandra Maler, James Dalgleish and Dan Grebler)