Central Falls, Rhode Island Bankruptcy: Plan Saves Tiny City But Leaves Scars

Bankruptcy Plan Saves Tiny City, But Not Without Scars
In this Thursday, Jan. 12, 2012 photo, cars pass a welcome sign at an entrance to Central Falls, R.I. The state of Rhode Island stepped in to take over financially struggling Central Falls in 2010, with a state-appointed receiver filing for bankruptcy on behalf of the city in August 2011. (AP Photo/Steven Senne)
In this Thursday, Jan. 12, 2012 photo, cars pass a welcome sign at an entrance to Central Falls, R.I. The state of Rhode Island stepped in to take over financially struggling Central Falls in 2010, with a state-appointed receiver filing for bankruptcy on behalf of the city in August 2011. (AP Photo/Steven Senne)

* State intervention protects bondholders, stops contagion

* Retirees' pensions slashed, elected officials stripped of power

* Cops, firefighters get raises; residents say service remains good

By Hilary Russ

Central Falls, R.I., Sept 3 (Reuters) - Central Falls, in Rhode Island, is close to emerging from bankruptcy with a plan that hammers its retired municipal employees but leaves bondholders unscathed, in a contrast with other recent U.S. municipal bankruptcies.

On Thursday, a state-appointed receiver overseeing the finances of the tiny, impoverished city is expected to win court approval for a plan that rescues Central Falls from financial collapse and should balance its budget for at least the next five years.

Unlike the approach of some other U.S. states such as California, which left struggling cities to try to fix their finances on their own, the plan for Central Falls reassured the credit markets, but scarred the city.

The smallest city in Rhode Island and the only one ever to file for bankruptcy will emerge with powerless elected officials, property owners facing tax hikes every year and retired public employees irate about having their pensions slashed.

"We understand how truly burdensome these cuts are," said Ted Orson, the attorney for Central Falls' receiver. "But they were the only way for us to do what we were on the way to doing, which is coming out of bankruptcy with a city that is now functional."

The city never missed a payment on its $19 million of currently outstanding general obligation bonds, but that is of little comfort to those who are bearing the cost of the rescue.

"We've been pilfered and beaten down," said Bruce Ogni, president of the Central Falls police retirees organization. "We didn't have the power, the money, to fight it."

The cuts drove home the message to public sector pensioners in other Rhode Island cities that if they didn't agree to renegotiate their retirement benefits, they could be facing even steeper cuts if their city goes bankrupt. In Providence, the state capital, retirees agreed this June to major changes to help the city avert bankruptcy.


Central Falls is a city of about 19,400 people, 60 percent of them Latino, crammed into 1.2 square miles. Over time, as elsewhere in Rhode Island, it lost its textile mills and factories. A quarter of its residents live below the poverty line - twice as many as the state average - and the median household income is just under $34,400.

In some places, grass pushes through cracks in sidewalks in front of boarded up triple-decker, multi-family homes. Elsewhere, stately churches and tidy bungalows anchor neat streets.

In the spring of 2010, Central Falls was facing insolvency due to steep cuts in state aid, revenue shortfalls - and an unfunded liability of about $80 million for pension and retiree health benefits. The city had revenue collections of about $16 million but expenses topped $21 million.

That May, the city asked to be put into judicial receivership, and the municipal bond market and credit rating agencies bristled.

In response, state lawmakers quickly passed two different laws that preserved Central Falls' ability to continue borrowing, as well as the state's reputation in credit markets.

One law protected bondholders, giving them a lien on property tax revenue. The other established a three-tier system - a fiscal overseer, a budget commission and a receivership - for the state to intervene in financially distressed cities.

"Access to the credit markets ... is extremely important, and given the size of Rhode Island, we did not want Central Falls to have some kind of contagion impact on our other communities," said Rosemary Booth Gallogly, director of the Rhode Island Department of Revenue, who orchestrates the state's oversight of distressed municipalities.

The way Rhode Island stepped in "reflects positively" on the state and its municipalities' creditworthiness, said Alan Schankel, who runs municipal bond research for Philadelphia-based Janney Montgomery Scott.

Janney holds some Rhode Island bonds and has provided financing for both stable and struggling local municipalities there, Schankel said.

In California, it took three years and about $10 million in legal fees to get the city of Vallejo out of bankruptcy in August 2011. This summer saw two other major municipal bankruptcies there, Stockton and San Bernardino, where bondholders could take haircuts.

Both California and Rhode Island have among the widest yield spreads on 10-year, top-rated municipal bonds, according to Municipal Market Data, a unit of Thomson Reuters. But California, one of the largest borrowers on the U.S. municipal bond market, has a yearly average of around 87 basis points, well above the 54 basis point of Rhode Island.


Mayor Charles Moreau started cutting the city's workforce after asking for a judicial receiver in May 2010. City employees now total 116, down from 174.

The city's only community center was shut, cutting 32 positions. The library was also closed, reopening later under nonprofit management.

While positions were cut, base salaries rose. On average, city employees made $41,650 annually before the bankruptcy. Today, Central Falls employees earn an average base salary of $47,500. And they'll get annual 2.5 percent raises for at least the next five years, said Gayle Corrigan, the receiver's chief of staff.

The city's 133 retirees had their pensions cut by up to 55 percent, with pensioners now getting an average of $16,626 a year. The state allocated $2.6 million to soften the blow for the next five years.


Central Falls' bankruptcy left its elected officials powerless. Even in January when state officials think they can hand the reins back to city council members and the mayor, the bankruptcy case will continue in court and the state will retain oversight, allowing it to step back in if local elected officials veer from the five-year budget plan.

"I don't know how much they're going to let us do," said city council president William Benson Jr. "We just have no authority and no power."

The city council is still embroiled in a legal battle against the state for taking over. The mayor did not return a call seeking comment, and no one answered the door at his home last week.

Local taxpayers will foot the bill for the fees and costs for the receivership and bankruptcy, which will top $3 million. Included in that figure is $97,000 associated with the cost of drafting the state legislation, and the cost of the receivership.


Several Central Falls' residents said they haven't noticed much difference because of the bankruptcy.

Rafael Brandon, 41, said firefighters responded immediately when his family's home caught fire in July. "They're pretty good. When you call them, they show up quickly," he said, adding that police are equally responsive.

But Benson, from the city council, said that Central Falls is not really out of the woods.

The city's total gross assessed property value dropped to about $524 million from nearly $804 million between fiscal years 2010 and 2011. Even so, with the annual 4 percent property tax hikes through 2017, Central Falls expects its revenue collections to grow from $16.6 million in fiscal 2013 to $19.8 million in 2017.

Thomas E. Cawley Jr., 85, and his wife Bernadette will be paying those increased property taxes on the home in which they've lived for 55 years.

Cawley was a Central Falls police officer for 26 years, retiring as a sergeant in 1986, the same year Rolling Stone magazine labeled the city the biggest cocaine hub in the Northeast.

At his dining room table, Cawley gazes through thick glasses at a pile of letters. One, from September 2011, informed him that after making payments for a $20,000 life insurance policy for 24 years, his policy had been canceled as part of the city's austerity plan.

Cawley's annual pension payment was slashed to $18,274 from $27,073 and his health insurance was moved to Medicare from Blue Cross at a cost to him of $100 a month.

He, like other Central Falls employees, gets no Social Security benefits from his city job, though he receives about $6,000 a year in Social Security payments from old part-time jobs.

He and his wife are angry, but the retirees didn't have the money or power to fight it, they said. "We have to live on what we're getting," he said. "What else can you do?"

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