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'Bright future' turns bleak: RI city files for bankruptcy

The city of Central Falls, Rhode Island — one of a handful of U.S. cities and counties facing fiscal collapse in the wake of the economic recession — has filed for bankruptcy.
/ Source: staff and news service reports

The city of Central Falls, Rhode Island — one of a handful of U.S. cities and counties facing fiscal collapse in the wake of the economic recession — has filed for bankruptcy.

The Chapter 9 bankruptcy filing marks a symbolic blow as state and local governments struggle to pull themselves out of the recession.

The smallest city in the smallest U.S. state made the filing Monday as it grappled with an $80 million unfunded pension and retiree health benefit liability that is nearly quadruple its annual budget of $17 million.

The front page of the city's website displays its motto, "A City with A Bright Future," above contact details for its receiver, Robert G. Flanders, and the message, "Central Falls Welcomes Office of the Receiver."

"Services have been cut to the bone," Flanders said, according to the Providence Journal. "Taxes have been raised to the maximum level allowable."

But he said the city would eventually emerge from the crisis.

"From the ashes of bankruptcy, Central Falls will rise again — a slimmer, sleeker city ready to stand on its own two legs as an independent municipality or to merge, marry or consolidate services with one of more of its neighbors," he added.

The Journal reported that the bankruptcy filing made police, fire and municipal employee contracts void.

Flanders also said he would save $2.5 million by cutting 141 retired police and firefighter pensions, the paper said. Retirees and active employees will also be required to pay 20 percent of their health-insurance coverage.

Jobs to be cut
The receiver added that jobs would be cut, without giving further details.

"Everything was done to avoid this day," Flanders, a retired judge, said.

"We negotiated with ... the police and fire unions, without success, attempting to reach voluntary concessions, and we tried in vain to persuade our retirees to accept voluntary reductions in their benefits," he added.

A hearing was due to be held Wednesday at a federal bankruptcy court in Providence, the state's capital, the Journal said.

Residents in this city of just 18,000 reacted to the news with disappointment and resignation.

The big question on their minds was if another nearby town, like neighboring Pawtucket, or the state itself would take over their city.

"I'd be curious as to who's going to take it over. Someone has to, but no one wants to," said Dan Mercure, 48, on a break from his job at an auto parts store. "It's going to hurt business, it's all mom-and-pop stores here."

Ulysses Ortiz, a 50-year-old retiree, said whatever budget cuts will be imposed would hurt residents, who have already borne the brunt of heavy budget cutting.

"It's too bad, because Central Falls has always been a progressive city," said Ortiz. He added that he hoped the city would not be absorbed by one of its neighbors. "We've been here for more than a century," he said.

Central Falls, which has been under state control since July 2010, has $21 million of outstanding debt, credit rating agency Moody's said.

State officials worked to avoid a municipal bankruptcy filing, saying it could upset Rhode Island's other fragile localities.

Earlier this year, the state passed a law that guarantees bondholders will be paid before a distressed city like Central Falls deals with its other obligations. It was not immediately clear whether the law would hold up in bankruptcy court.

Rhode Island Governor Lincoln Chafee said the situation was "dire" and required "decisive" action.

"This is a wake-up call for other struggling towns," said Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University. "States should be looking at Rhode Island and saying, 'How can we avoid this?"

Dire predictions not fulfilled
Still, dire predictions of mass municipal defaults made late last year by Wall Street analyst Meredith Whitney have not come to pass. A string of failures could rattle the $2.9 trillion U.S. municipal debt market.

The Central Falls filing was not the start of a "huge nation-wide trend", said Adam Stern, a vice president at Boston-based Breckinridge Capital Advisors, a municipal bond investment firm.

"A bankruptcy filing is sort of an endgame over years and years of economic distress, so it's not something your typical U.S. town or city is likely to experience anytime soon," he said.

There have been only 624 municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code since 1937, with five occurring last year, according to James Spiotto, a municipal bankruptcy expert at the law firm Chapman and Cutler.

Alabama's Jefferson County is currently working to ward off the largest municipal bankruptcy in U.S. history stemming from its $3.2 billion sewer bond crisis.

The Pennsylvania state capital of Harrisburg, which has about $300 million incinerator debt, is also considering bankruptcy.

Those cases lead some to take a pessimistic view on the future of municipal bankruptcies in the United States.

"Chapter 9 has been a fairly unusual event but we and many others think that's not necessarily going to be the case going forward," said Sean Scott, a municipal bankruptcy expert at law firm Mayer Brown.