A Chapter 9 process works well when there is a positive partnership between stakeholders, the bankruptcy attorney for formerly bankrupt Central Falls, R.I., emphasized during the recently held Bloomberg State & Municipal Finance Conference in New York.
Ted Orson, the Central Falls bankruptcy attorney and a name partner in the Providence, R.I.-based law firm Orson and Brusini Ltd., explained during a panel discussion about distressed municipalities how just prior to filing for Chapter 9, a negotiation with retirees to slash their pensions by 50% was unsuccessful.
Orson said however that once the city went into bankruptcy protection, he was able to negotiate up to 55 percent cut in retiree pension expenses that included an appropriation from the state that their benefits would not be slashed by more than 25 percent within the first five years. What resulted Orson explained was a planned debt adjustment where Central Falls emerged with five years of balanced budgets by court order along with sustainable pension and other-post-employment benefit liabilities (OPEB).
“The takeaway is Chapter 9 works,” said Orson, who helped the roughly 19,000-population one-square-mile Rhode Island city that had an $80 million unfunded pension liability exit bankruptcy in September 2012 only 13 months after filing. “It’s a terrible process for the stakeholders, many of whom were lied to for so many years, but if you go in with a plan to fix the city you can do it with the powers you get in bankruptcy.”
While chapter 9 has been a positive solution for Central Falls’ previous fiscal woes, Harrisburg, Pa. receiver William Lynch said during the panel that bankruptcy would not have been the right course of action during his work clearing Pennsylvania’s capital city of massive debt. After a bankruptcy plan was rejected in late 2011, Harrisburg instead opted for a debt restructuring plan.
“I think that would have kept the city from any kind realistic participation in the markets for a long time,” said Lynch on why a bankruptcy plan was not in Harrisburg’s best interests. “I also believe the city would have been left without a source of income.”
Rhode Island attorney William M. Dolan III, who represented the state’s capital city Providence in a class action pension reform litigation from 2011-2013, emphasized during the Bloomberg forum how a large loss of state aid to cities and towns in the Ocean State contributed greatly to the financial problems certain localities have been facing.
“When states solve their problem they often solve it on the backs of the municipalities that then have to live with the consequences of that,” said Dolan pointing to how Rhode Island lawmakers slashed Providence’s state aid by $40 million in 2008 during the midst of a nation-wide financial crisis.
Orson explained how proper communication was a key element of why the Central Falls bankruptcy process has netted some positive results thus far.
“We decided early on that we would not leave until we had five years balanced budget and sustainable pension and OPEB obligations,” Orson said. “In every negotiation we had, we tried to be completely transparent, give the other side all the information they needed before we even discussed any sort of cuts.”
