Ironically, the news broke just as Detroit filed for bankruptcy. But the story was different Thursday for formerly bankrupt Central Falls, R.I., which received an upgrade from Moody’s Investors Service to B1 from B2.
Although the new rating is still junk level, Rhode Island local and state officials were pleased at the upgrade.
“This is positive news and so refreshing here. It continues the momentum the city has built. We’re all striving to bring this city back on a stable path,” Mayor James Diossa said in an interview Friday.
Moody’s retained a positive outlook for the 18,000-population city, which filed for bankruptcy in August 2011 and exited a year later.
In October, one month after Central Falls exited, Moody’s raised the city to B2 with a positive outlook from Caa1 with a negative outlook.
“The fiscal framework that we put in place for the city is proving to be effective and winning confidence with the investment community well beyond Rhode Island’s borders. The upgrade will bode well for the state as well as Rhode Island’s municipalities,” Gov. Lincoln Chafee said in a statement.
A 2011 state law made bondholders whole in any bankruptcy.
“This is more good news coming from the Central Falls bankruptcy and again demonstrates that if municipalities paid their public debt in full during the insolvency proceedings, the capital markets will respond in positive ways,” said Ted Orson, the city’s bankruptcy attorney and a name partner in Providence firm Orson and Brusini Ltd.
Moody’s said the upgrade “reflects the city’s successful emergence from Chapter 9 bankruptcy and transition to local control following the adoption of a bankruptcy plan and its acceptance by the federal court.”
Moody’s has also affirmed the Ba1 underlying rating on the Rhode Island Health and Educational Building Corp.’s Series 2007B bonds, affecting $1.3 million in rated RIHEBC pooled debt; the outlook is stable.
Central Falls, seven miles north of capital Providence, filed for bankruptcy protection in August 2011, citing an $80 million pension liability. While under Chapter 9 protection, the city worked out a plan with retired police officers and firefighters that cut benefits by up to 55%.
Bankruptcy Judge Frank Bailey in Providence approved the city’s six-year financial plan and exit from Chapter 9 last September. The plan balances budgets through 2017.
“This reflects the hard work of the teams from the city and state, and more importantly, the relevance of the the sacrifices made by residents, active, and retired employees that brought structural balance to Central Falls,” said state revenue Director Rosemary Booth Gallogly.
Moody’s said challenges for Central Falls include a limited tax base and weak demographic profile; large unfunded pension liabilities, despite significant reductions; reduced levels of state aid and statutory property tax levy limitation; and an elevated debt burden with a significant amount of deferred capital projects.
“It will continue to be challenging, but it is gratifying to see the improvements recognized,” Gallogly added.
Standard & Poor's, in a report it issued Friday afternoon, said Rhode Island's three-step intervention helped Central Falls. “In contrast with Rhode Island, Michigan has taken a more hands-off approach to assisting Detroit,” S&P said. “The state has provided no funding to the city and passed no laws regarding how secured or unsecured debt will be handled.”
Diossa, who took office in January at age 27, previously served on the City Council for three years. “I saw the whole thing happening and I’m very happy to see our situation improve,” he said. “We’re fiscally transparent now and everyone’s very engaged in the process.”
Diossa, a Central Falls native and the son of Colombian immigrants, handily defeated former police chief Joseph Moran in a special election for mayor in December, after the state returned local control to the city.
The previous mayor, Charles Moreau, received a two-year prison sentence in February for accepting gifts in exchange for awarding a contract to board up at least 167 foreclosed properties within the city from 2007 to 2009. Moreau resigned last September.
Diossa said Detroit’s struggles might help draw attention to those of distressed municipalities nationwide.
“Detroit’s on a different scale, but once you’re in bankruptcy court, the situation is very similar. My message to Detroit is that it’s a painful process, but there’s life after bankruptcy.”
Mark Schwartz agreed. Schwartz represented the Harrisburg, Pa., City Council during its failed bankruptcy attempt in November 2011.
“This shows the power of bankruptcy and regeneration. Harrisburg would be on the same road back if bankruptcy were allowed. Instead it is nowhere,” said Schwartz, a solo practitioner from Bryn Mawr, Pa.
A Pennsylvania law in 2011 banned Harrisburg, its capital, from filing for bankruptcy for one year.