The tiny city of Central Falls, R.I., (pop: 19,000) is verging on insolvency, thanks in large part to growing unfunded liabilities for pensions and other post-employment benefits (OPEB) for city employees.
A state-appointed special receiver, who took over management of the city's finances in May, has issued a 102-page report to the governor that calls for significant local and state statutory reforms to collective bargaining, pension and OPEB provisions to help rescue the troubled municipality.
The receiver---retired Associate Justice Mark A. Pfeiffer of the Rhode Island Superior Court---says Chapter 9 bankruptcy may be the only option left if the changes he recommends are not adopted or provide insufficient to close the gaping holes in the city's budget.
Pfeiffer's discussion of the pros and cons of bankruptcy (on pp. 82-86 of the report, as pointed out to us by the estimable Donald Boyd of Albany's Rockefeller Institute of Government) should attract interest from distressed municipalities and their state overseers across the country.
A state-appointed special receiver, who took over management of the city's finances in May, has issued a 102-page report to the governor that calls for significant local and state statutory reforms to collective bargaining, pension and OPEB provisions to help rescue the troubled municipality.
The receiver---retired Associate Justice Mark A. Pfeiffer of the Rhode Island Superior Court---says Chapter 9 bankruptcy may be the only option left if the changes he recommends are not adopted or provide insufficient to close the gaping holes in the city's budget.
Pfeiffer's discussion of the pros and cons of bankruptcy (on pp. 82-86 of the report, as pointed out to us by the estimable Donald Boyd of Albany's Rockefeller Institute of Government) should attract interest from distressed municipalities and their state overseers across the country.
Chapter 9, Pfeiffer warns, is not a panacea. While a bankruptcy filing
could lead to restructuring of collective bargaining agreements and
pension benefits for both current and future retirees, he says, it
"could also result in municipal debt obligations being rejected."
"Therefore," he adds, "while Chapter 9 facially offers opportunities for a distressed community to manage its unfunded pension and OPEB liabilities, practically speaking, any such filing may be more damaging than helpful to the subject municipality."
When Central Falls first filed for a form of judicial receivership last spring, Pfeiffer notes, the result was "a state of concern among municipal bond underwriters and rating agencies that were performing services for the State and its municipalities." In other words, Central Falls posed a financial contagion threat to all of Rhode Island.
Pfeiffer said he was worried that a formal bankruptcy filing would "impair the ability of the subject municipality, other cities and towns and/or the State itself to access capital markets in order to function."
His solution: enact a state statute "that would arguably create a security interest in favor of bond holders as to future revenues, thereby allowing the lien to survive a Chapter 9 bankruptcy proceeding." Pfeiffer cited a 1995 decision upholding a statutory lien in the bankruptcy of Orange County, California.
The lien suggested by Pfeiffer would effectively insulate bondholders from any losses andfocus all corrective actions put the onus on municipal unions and other creditors to restructure their deals with the city.
Pfeiffer submitted draft language for such a statute in the last
section of an Appendix to his report. (Even if the statute is enacted, Pfeiffer says bankruptcy should be viewed as "a last resort.")
Hmmm. What do we think of this?
"Therefore," he adds, "while Chapter 9 facially offers opportunities for a distressed community to manage its unfunded pension and OPEB liabilities, practically speaking, any such filing may be more damaging than helpful to the subject municipality."
When Central Falls first filed for a form of judicial receivership last spring, Pfeiffer notes, the result was "a state of concern among municipal bond underwriters and rating agencies that were performing services for the State and its municipalities." In other words, Central Falls posed a financial contagion threat to all of Rhode Island.
Pfeiffer said he was worried that a formal bankruptcy filing would "impair the ability of the subject municipality, other cities and towns and/or the State itself to access capital markets in order to function."
His solution: enact a state statute "that would arguably create a security interest in favor of bond holders as to future revenues, thereby allowing the lien to survive a Chapter 9 bankruptcy proceeding." Pfeiffer cited a 1995 decision upholding a statutory lien in the bankruptcy of Orange County, California.
The lien suggested by Pfeiffer would effectively insulate bondholders from any losses and
Hmmm. What do we think of this?
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