Rhode Island City (Central Falls) files for bankruptcy; contracts voided

CENTRAL FALLS, R.I. — The state-appointed receiver overseeing cash-strapped Central Falls filed for bankruptcy Monday morning on the city’s behalf in an effort to help it get back on its financial feet.

Receiver Robert G. Flanders announced the step at City Hall Monday. He was joined by Governor Chafee, who says the move is needed to address Central Fall’s finances.

“The current situation is dire,” Chafee said, “and it necessitates decisive steps to put the city back on a path to solid financial footing and future prosperity. We will be exploring all options to provide quality services at an affordable cost to all taxpayers.”

Employees and retirees, effective Monday, must pay:

• a higher health insurance deductible
• changes in medical co-payments
• a 20 percent co-share of health insurance premiums

Pensioners‘ next payment in late August / early September will be reduced as Flanders explained July 19

A motion was filed to immediately reject the Collective Bargaining Agreements with:

• the Police Union, which expires on June 30, 2012
• the Firefighters’ Union, which also expires on June 30, 2012
• and the Municipal Workers’ Union, which expired on June 30, 2011.

central_falls.JPGJoe Faria, a former state representative, listens as Robert G. Flanders declares the city bankrupt.

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All contracts with municipal workers and retirees, including the fire and police departments, are immediately voided.

Retirees must begin to pay 20 percent of their medical coverage effective immediately, as Flanders proposed when he met with the city’s retirees July 19.

“Everything was done to avoid this day,” Flanders said.

“Services have been cut to the bone. Taxes have been raised to the maximum level allowable.

“We negotiated with Council 94 and 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.”

The case was filed by Providence lawyer Theodore Orson as a Chapter 9 petition. Pursuant to court rules, the chief judge of the 1st Circuit Court of Appeals, Sandra L. Lynch, designates the judge who will oversee the case. Lynch designated U.S. Bankruptcy Judge Frank Bailey, of the District of Massachusetts, to conduct all proceedings in the case.

Extras: Central Falls’ application for bankruptcy || Central Falls’ qualifications for bankruptcy || Motion to approve rejection of 3 collective bargaining agreements

Bailey will work with Flanders with the aim of having a plan within 30 days to allow the city to emerge from bankruptcy.

Flanders had earlier indicated that filing for Chapter 9 bankruptcy protection in federal court might be the only option unless municipal retirees and city workers made major voluntary concessions.

The petition states there are between 200 and 999 creditors.

The city has $80 million in unfunded pension and benefits obligations and $5 million deficits projected for each of the next five years.

In papers filed with the bankruptcy court, Flanders said, “the city’s to the point where it is insolvent. The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased.”

Deficits are expected to grow in each of the coming years, he said.

“On or before August 21, 2011, the city will lack sufficient revenues or cash flow to pay its bills as they become due, and then will not be able to pay its debts as they become due in every succeeding month for the remainder of the fiscal year (which ends on June 30, 2012) except for the month of October 2011… In addition, the city is no longer able to access capital markets.”

Flanders says that through the Chapter 9 proceeding, “the city seeks to develop and implement a plan of debt adjustment that will return the city to solvency and viability. To do so, the city must modify its debts and obligations so that they do not exceed the city’s projected revenues.

“The motion to void the city’s three collective bargaining agreements,” Flanders states, “is a critical step toward achieving that objective.

“The city’s financial difficulties are extraordinarily severe. Without making changes authorized under Chapter 9, the city projects a deficit in fiscal year ending June 30, 2012 in the amount of approximately $5.6 million based on projected revenues of $16,436,022 and projected expenses of $22,036,396….

“Simply stated, the city cannot restore balance to its budget unless it restructures its labor costs as a critical element of any plan to debt adjustment. In FY 2012, the largest city expenditure is the cost of labor, and the largest portion of the city’s labor costs is paid to union employees.”

“Given today’s action,” General Treasurer Gina M. Raimondo said in a news release, “the governor and I are even more resolved to pursue comprehensive pension reform this fall to protect other state and municipal retirees and employees as well as taxpayers from the heartache of the drastic measures being taken in Central Falls. None of these groups did anything wrong and allowing this to happen again is unacceptable.”

“The time for state leaders to act is now, so we avoid future catastrophe,” Raimondo said, adding she did “not expect today’s move to hinder the state’s ability to access the bond markets in the coming months.”

“It is unfortunate that the hard-working people of Central Falls, already hit hard by the recession, must now pay for years of poor management and patronage,” Councilman James Diossa said in a news release Monday morning, calling the latest chapter in the city’s finances “our opportunity to build a new foundation for our city. It will be difficult, requiring sacrifice and hard choices, but I know that Central Falls remains a ‘City with a bright future.'”

Chapter 9 is the part of the federal bankruptcy code that deals with government entities. It offers municipalities similar protection from creditors that business get when they file under Chapter 11, but there are differences.

In a commercial bankruptcy, the judge has the authority to order the sale of assets, even the closing of the business, to pay the creditors. But a government can’t be sold off.

A Chapter 9 judge can approve or reject a receiver’s settlement proposal. But he or she can’t order the sale of assets because of the Tenth Amendment to the United States Constitution, which states that any powers not specifically given to the federal government by the Constitution belong to the states, meaning a federal bankruptcy court can’t tell the city how to run its affairs, like selling assets.

“The city did everything reasonable and feasible that it could to avoid filing a petition under Chapter 9,” Flanders says in Monday’s court filing. “It drastically cut services. It raised taxes to the maximum allowable. It attempted, without success, to negotiate voluntary concessions from the retirees and the unions that would allow the city to return to fiscal viability. it even requested a bailout from the state which may have set a precedent that the state might not have been able to afford.

“The city finally reached a fork in the road and had to make a choice. In one direction lay Pritchard, Alabama, where that city has defaulted on its obligations and simply stopped making pension payments to its retirees. In the other direction lay Chapter 9, and the realistic hope of restructuring the city’s finances and re-making Central Falls in a relatively short period of time into one of Rhode Island’s viable financial communities.

“It prudently chose to go down the road of Chapter 9. It is ‘eligible’ to do so.

“If Congress did not have cities such as Centrall Falls in mind when it drafted Chapter 9, then what did it have in mind?”

Other municipalities have filed for bankruptcy before. Since it was enacted in 1937, Chapter 9 has been invoked about 600 times, but most of those cases were smaller government entities like sewer or water districts. The community of Vallejo, Calif., filed three years ago and is scheduled to come out of bankruptcy this year.

Lawyers who have studied the limited case law involving municipalities filing bankruptcy say it allows the city to impose changes in its contracts with employees, but it is unclear how much authority a court would have to approve unilateral changes in pensions.

Most municipal bankruptcies have been solved by the municipality finding the savings in the operating budget. And while courts have ruled that pension extras like cost of living increases can be reduced, legal experts said the case law is not clear on whether the base pension itself can be cut.

— with reports from W. Zachary Malinowski, Tracy Breton, and John Hill, Journal staff writers, and the Associated Press – http://newsblog.projo.com/2011/08/receiver-chafee-central-falls.html

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