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Hard Times in Central Falls, R.I. Debt-Ridden City Appoints Receiver

Maybe the solution is to fire all the teachers again. It must be their fault. Don't know how to blame teachers for this? Ask Arne.

by Romy Varghese

Central Falls, a small and deeply troubled Rhode Island city, has handed control of its finances to a receiver, a rare step that many in the $2.8 trillion municipal-bond market are watching to see how stressed municipalities may deal with deepening fiscal problems.

The city of about 19,000 people, a third of whom live in poverty, is struggling with growing budget deficits and the need to pay interest on about $17 million in general obligation debt.

It is a common story in towns and cities across the country, although Central Falls, whose slogan is "City with a Bright Future," has chosen to take a different path in efforts to pull itself out of trouble.

The Rhode Island Superior Court in Providence on May 19 appointed attorney Jonathan Savage as a temporary receiver and on Wednesday the court will hold a hearing on appointing a permanent receiver.

The mayor and most of the city council considered receivership a better alternative than a process in which the state government would appoint a panel to review the city's finances. Rhode Island, like 22 other states, has no law permitting municipalities to reorganize their finances under Chapter 9 of the federal bankruptcy code.

As an alternative to bankruptcy, Rhode Island normally appoints a panel to review distressed cities' finances. Central Falls went through that process in 1991, but now wants more than advice, it wants a receiver to do whatever it takes—such as unilaterally rewriting contracts, cutting pension benefits or restructuring debts—to cut city spending to match revenues.

Mr. Savage has already suspended noncritical expenses and sent early tax bills, and is reviewing the city's finances with a former state auditor general. He said the city would make a $4 million payment on tax anticipation notes due June 30.

"We expect to have sufficient cash on hand to meet our obligations,"' said Mr. Savage.

A permanent receiver would then be able to rework union contracts, bond payments and other obligations, with court approval. It isn't yet clear if the receiver's decisions could withstand legal challenges from unions or bondholders.

Central Falls has a budget of about $18 million and projects it will have a deficit of $3 million this year and $5 million in fiscal 2011. The city, about six miles north of Providence, is wrestling with 14.5% unemployment.

The city's pension fund has $4 million in assets and about $35 million in liabilities.

"We are going to see, unfortunately, given the prolonged nature of this downturn, more financial distress situations," said Jim Spiotto, a restructuring specialist and partner at law firm Chapman & Cutler in Chicago.

State officials oppose appointing a receiver because he may alter Central Falls' debt payments, which could make it harder for other cities and towns in the state to sell municipal bonds. They are weighing their legal options to challenge the receivership.

The state legislature passed a $7.86 billion budget Friday that closed $427 million deficit in part by cutting about $165 million to municipal governments and school districts, according to the Providence Journal.

The proposed cuts "will in all likelihood put several municipalities over the precipice, "said Dan Beardsley, executive director of Rhode Island League of Cities and Towns, a private, non-partisan association of local governments.

"The problems Central Falls is facing are far beyond any fix the state budget commission could do" said Joseph Larisa, a private lawyer the city hired to advise it on the receivership application.

Without the powers of the receiver to rework the city's obligations, the city would have to double property taxes to fix both the budget deficit and the pension underfunding, Mr. Larisa said. Such an increase, he added, would be "unconscionable" for the poor community.



— Romy Varghese
Wall Street Journal
2010-06-09
http://online.wsj.com/article/SB10001424052748704256604575294752929982426.html?mod=WSJ_hps_sections_news#articleTabs%3Dcomments

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