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NEW YORK (Reuters) - Even an anti-default state law might not prevent Central Falls, the tiny Rhode Island city forced into bankruptcy by ballooning pension costs, from defaulting on some debt, credit agency Standard & Poor's warned Friday.
Rhode Island enacted the law to safeguard other cash-strapped cities and towns in the state to reassure potential investors who might be alarmed by the possibility that more bankruptcies lie ahead.
Bankruptcies are rare events in the municipal bond market, but the economies and fiscal health of many states, counties, cities and towns are under stress because of the shallowness of the country's recovery from the recession.
This intensifies concerns that there will be more bankruptcies, a step being considered by Alabama's Jefferson County.
A Jefferson County bankruptcy would be the biggest in U.S. history. As demonstrated by California's Vallejo, which filed for bankruptcy three years ago, this strategy can be lengthy and expensive.
Standard & Poor's, referring to the recent Rhode Island law's technical name in its statement, said:
"Given the Chapter 9 bankruptcy filing, the prospect of full and timely payments on the General Obligation debt is uncertain, notwithstanding that, pursuant to the recently amended Rhode Island General Laws in Chapter 45-12-1, a first lien on ad valorem taxes and general fund revenues secures the bonds."
S&P said the outlook for Central Falls, which only has 19,000 residents, was "developing." In May, the credit agency cut the city's credit rating to C from BBB-minus.
Central Falls is current on all its debt payments, S&P said. "City officials have expressed to Standard & Poor's that Central Falls intends to continue to make full debt service payments and prioritize debt," it said.
Now under the control of a receiver, Central Falls has an $80 million shortfall in its pension fund and its bill for retiree healthcare is more than four times its annual $17 million budget.
City officials have asked the bankruptcy court to reject its collective bargaining agreements with the police, fire, and municipal employees unions, S&P said.
That is not the only harsh medicine expected: Central Falls officials also plan to wring most cost savings out of city workers. S&P said the methods include "increased copayments, deductibles, and coshares of premiums on active employee and retiree health plans and a reduction in pension plan cost-of-living adjustments."
Reporting by Joan Gralla, Editing by Chizu Nomiyama