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Central Falls, R.I. Could Exit Bankruptcy Next Week

PROVIDENCE, R.I. — Central Falls, R.I., which filed for Chapter 9 protection a year ago, could exit next week after a mere 13 months. Its quick march to the brink of an exit does not surprise the city’s bankruptcy attorney, Ted Orson.

“One of the reasons why we were successful was that we had very clearly set out goals. We took a city with one of the worst possible financial profiles and in 13 months, will hopefully emerge with five years of balanced budgets and sustainable pension and OPEB [other post-employment benefits] systems by court order,” Orson said in a joint interview with Rhode Island revenue director Rosemary Booth Gallogly.

Orson, speaking in Gallogly’s office across Smith Street from the state capitol, warned that the exit is not yet complete, citing bankruptcy Judge Frank Bailey’s scheduled hearings for Sept. 6 and 7 in Providence.

Central Falls, a one-square-mile city with a 19,000 population, had an $80 million unfunded pension liability when it filed on Aug. 1, 2011. The state-appointed receiver at the time, retired state Supreme Court Justice Robert Flanders, negotiated 55% cuts in pension benefits for retired police officers and retirees.

“Bankruptcy wasn’t easy, but we helped get Central Falls on a good path. No way are we saying that Central Falls is totally on solid footing, but we have it on a good path,” Gov. Lincoln Chafee said in a separate interview at the state capitol.

Central Falls is one of Rhode Island’s poorest municipalities, the recession intensifying its problems. According to Moody’s Investors Service, assessed values there dropped 34% in fiscal 2011.

Orson, a name partner at Providence firm Orson and Brusini Ltd., praised state officials for working together on Central Falls.

“One of the reasons why we’re so close to exiting bankruptcy is the extra attention we’ve gotten from the leadership. They profoundly understood the problems that a city faces. Both of them understood the goals and never wavered from the problem. There was no ego, no attitude,” Orson said, naming Gallogly and Chafee. Karen Grande of Edwards Wildman Palmer LLP, Rhode Island’s municipal finance counsel, was also involved.

Moody’s, noting the city’s progress, placed its general obligation rating on review for upgrade last month, though at Caa1, Central Falls is deep into junk status.

Two Rhode Island laws made it easier for Central Falls. In 2010, the state passed the Fiscal Stability Act, which created a three-tiered system of state intervention and whose intent was to protect all Rhode Island communities’ bond ratings from potential fallout. And last year, the General Assembly passed a law giving bondholders priority lien on property taxes and general fund revenues in any Chapter 9 filing.

“Rhode Island has been a relatively bondholder-friendly state and oversight is helping the distressed communities. It seems to have helped the most troubled communities — Central Falls, Woonsocket and East Providence,” said Naomi Richman, a managing director at Moody’s.

Woonsocket, home to CVS Caremark Corp., and East Providence are under the oversight of budget commissions, the second step of state intervention.

Moody’s analyst Vito Galluccio warned that Rhode Island municipalities still face serious challenges. “Although there has been some stabilization and helpful intervention from the state, we still expect some challenges for cities and towns,” he said, citing a slow recovery, stagnant tax bases, property tax cap limits and a high unemployment rate. “They’ve been proactive, but there are still a lot of risks and we will continue to monitor them.”

Orson called the Central Falls case a game-changer. “It changes the communication that cities have with their stakeholders. Before Central Falls, when cities negotiated with stakeholders, there was a strong feeling that cities did it without an ‘or else’. Central Falls has made it very clear, at least in Rhode Island, that there is an ‘or else,” he said.

The city cleared a big legal hurdle last week, settling with former police chief Joseph Moran 3rd, who had sought to reclaim his job. Moran, according to the Providence Journal, agreed to accept an unsecured claim of $75,211, though he will probably get much less than that.

Also last week, Central Falls teachers’ union agreed on a two-year collective bargaining agreement, which Chafee, the school district and state Department of Education announced Monday.

The Central Falls case has drawn national attention.

Gary Lewis, a private-sector financial consultant in Scranton, Pa., praised Orson for going into Chapter 9 with a plan rather than simply tumbling into it chaotically.

“What Ted did in Central Falls is no different than how a professional services firm runs an engagement. Central Falls is doing it differently than the folks in Jefferson County, [Ala.,] and Vallejo, [Calif.,] who just threw up their hands and said, ‘We’re bankrupt,’ ” said Lewis, who has been trying to convince officials in distressed Scranton to seriously consider filing for bankruptcy.

Rhode Island officials, though proud, acknowledge the human side of the story and try to downplay any achievements.

“We’re trying not to brag, because a lot of people got hurt by this bankruptcy,” said Gallogly, whose department works with Rhode Island’s distressed communities. Eight last year received downgrades from Moody’s, which last week also lowered Johnston to A3 from A2.

Natalie Cohen, a managing director and head of municipal research for Wells Fargo Securities in New York, said Rhode Island communicated effectively. “We applaud the state’s officials for an education campaign that focused on the civic importance of maintaining the future quality of life in the state, rather than depleting personnel and services,” she said.

Gallogly said transparency and education were essential to offset possible distrust toward the state. “We wanted to make it clear that we weren’t going to do any more than we had to. The power given us under the Fiscal Stability Act is something we take very seriously. We make the tough decisions, but if there’s something we have to do, we do it without taking it to the next level.”

According to Gallogly, the Central Falls case helped capital city Providence reach agreement on pension cuts with its retirees and unions, although union rank-and-file approval in that city still awaits.

“I’m not sure if Central Falls made it easier, but it made it clear that there was a potential alternative. Previously, we didn’t know what the alternative was,” said Michael D’Amico, chief of staff to Providence Mayor Angel Taveras.

D’Amico is “cautiously optimistic” that the unions will agree to the proposal. “We feel with this agreement, we can avoid bankruptcy,” he said.

Providence in June passed its $638 million budget, which includes more payments in lieu of taxes from Brown University of $3.9 million, and $250,000 from the Rhode Island School of Design. The budget also includes a $5 million replenishment for its rainy-day fund.

According to D’Amico, the rating agencies are beginning to look more favorably upon Providence. “We haven’t received upgrades from the rating agencies, but based on informal discussions, they feel that we’re taking steps in the right direction,” he said.

Meanwhile, Central Falls, East Providence and Pawtucket are discussing how they can save money by sharing municipal services, after Chafee in late June signed an executive order forming a task force that includes representatives of the three communities. Moody’s called its creation a credit positive for the three communities.

According to Chafee, some fears of loss of identity and turf still exist.

“Look at Central Falls. They’re only one square mile and yet they had their own mayor, council, finance manager and board of canvassers. People suggested merging it into Pawtucket and there was some pushback on that,” Chafee said. “OK, but improvements such as a central fire dispatcher should not be tangled up with identity issues.”

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