Plan to End Bankruptcy in Rhode Island City Gains Approval
Published: September 6, 2012 - New York Times
PROVIDENCE, R.I. — A federal judge paved the way on
Thursday for Central Falls, R.I., to emerge from bankruptcy by signing off on a
debt-adjustment plan a
little more than a year after the downtrodden city entered court protection.
The plan, which is expected to become effective in
mid-October, will ensure that the city repays its bondholders, largely by
raising taxes and making deep cuts in pensions and other employee benefits.
“It’s record time, and record efficiency,” said the
judge, Frank J. Bailey of the United
States Bankruptcy Court. “In a way, I think this is an example — for not
only Rhode Island, but maybe the nation — on how to run a Chapter 9,” referring
to the section of the bankruptcy code that provides protection for
municipalities.
But for many who live and work in Central Falls, the
plan represents blistering — if unavoidable — cutbacks.
For workers who retired the youngest, pensions will be
cut by up to 55 percent, although a state fund will bolster their benefits for
the next five years. Pensions at or below $10,000 a year will not be affected.
“It is a settlement about which no government
officials associated with Central Falls should be proud,” said Matt McGowan, the
lawyer who represents retirees. “In an example of abject irresponsibility on the
part of its elected officials, its pension plans were persistently and
habitually underfunded for a decade or more.”
The plan imposes a 4 percent property tax increase in
each of the next five years while the number of city employees has fallen. There
were 174 city workers in May 2010, and there are now 118, said Theodore Orson,
the lawyer for Central Falls’s receiver.
“Every stakeholder except the bondholders is suffering
here,” Mr. Orson said.
The City of Vallejo, Calif., emerged
from Chapter 9 bankruptcy last year after three years of protection. Efforts
by other bankrupt local governments, including Jefferson
County, Ala., and Stockton,
Calif., to shore up their finances have been hampered by legal
uncertainties.
Central Falls is Rhode Island’s densest city, with
nearly 19,400 people squeezed into 1.2 square miles. It is a poor city, too,
with a median income of just $34,389 per year, according to the Census Bureau.
But the city promised pensions commensurate with those
offered in much wealthier communities and by last year found itself with a
structural budget deficit of about $6 million, and with no way to pay the
roughly $80 million it owed in pension and health insurance benefits to more
than 200 police officers and firefighters. The city went into receivership in
2010 and declared bankruptcy on Aug. 1, 2011.
“We’re taking a city that was completely dysfunctional
and making it fully functional,” Mr. Orson said of the final debt-adjustment
plan, which is dated July 27.
In 2011, the Rhode Island State General Assembly
enacted a law giving
bondholders the right to place liens on tax revenue, hoping that
guaranteeing the repayment of city debt would prevent additional credit problems
and contagion in this tiny state.
“Without this statute, bondholders would not be paid
in full, and we would default on our bond obligations,” Mr. Orson said. “It
would have been extremely expensive to continue to access the capital market.”
Indeed, Moody’s Investors Service said this year that
Central Falls’s credit rating might be raised.
But giving the bondholders preference over other
creditors was controversial, and there were questions about whether the Rhode
Island law would be binding in a bankruptcy, where similarly situated creditors
are supposed to be treated equally.
The new normal for Central Falls may well be evident
in places like the Fire Department, where Lt. Mike Andrews, who is the union
president for the city’s firefighters, said the minimum number of active-duty
firefighters per shift has been reduced to seven from nine, straining an agency
that goes on about 5,000 runs per year.
The receivership is currently targeted to end on Dec.
31, although the state’s director of revenue, Rosemary Booth Gallogly, has said
she will have final say over whether the city’s elected officials are ready to
carry out their responsibilities under the plan. They will have to sign
quarterly statements attesting that city finances stick to the plan.
“It looks like the Germans occupying Paris, that’s
what it looks like,” said Lawrence Goldberg, who acts as special counsel to some
of the members of the Central Falls City Council.
After the court hearing on Thursday, Ms. Gallogly
acknowledged the difficulty of the Central Falls case, though she allowed
herself a small moment of celebration, high-fiving a member of the receiver’s
legal team.
“There have been a lot of people hurt from the
bankruptcy,” she said, adding that the agreement was “an accomplishment that
will help us bring the city forward and begin that healing.”