Emerging from bankruptcy protection without a bond default is a credit positive for Central Falls and other Rhode Island municipalities, according to Moody’s Investors Service.
“The confirmation is credit positive for the city because it concludes a 13-month bankruptcy period without reduced or mixed payments to general obligation bondholders,” Moody’s said in its weekly credit outlook, released Thursday. “Moreover, it is credit positive for other distressed Rhode Island cities because it shows a path to emerging from bankruptcy without defaulting on GO debt.”
Central Falls last week ended its 13-month stay in bankruptcy with Judge Frank Bailey in Providence giving his verbal agreement to the 19,000-population city’s five-year plan of adjustment.
A 2011 state law gave priority to bondholders in bankruptcy, essentially setting up Central Falls for its Chapter 9 filing on Aug. 1 of that year. The city had an $80 million unfunded pension liability and was close to defaulting on its cash-flow notes. Rhode Island is among only a few states with a priority lien for bondholders.
Also, Rhode Island in 2010 established a statutory, three-tiered system of state oversight.
While GO bondholders are made whole, retirees and current employees saw their pension benefits reduced by up to 55%. General vendors will also get only 45% under the plan, and lease holders are in line for 50%.
“The quick agreement of Central Falls’ active and retired employees to reductions in pre-bankruptcy benefits, along with state support for cash flow and five years of transitional payments were keys to maintaining balanced operations and future budgets. This could set a favorable precedent for other distressed Rhode Island cities,” said Moody’s, which downgraded eight Ocean State municipalities in 2011.
East Providence and Woonsocket are under budget review committees, each one step short of receivership.
Central Falls’ financial plan includes modest increases in property taxes, the city’s primary revenue source. State aid will increase in fiscal 2015 to support additional debt for school projects.
Non-debt expenditures are expected to increase modestly through fiscal 2017 and city employees covered by locally administered pension plans will be transferred to Rhode Island’s Municipal Employee Retirement System.
The budget fully funds annual pension contributions.
According to Moody’s, plan adherence will improve liquidity and replenish the fund balance. Rhode Island has deferred reimbursement to the state for receivership- and bankruptcy-related expenses, but Central Falls must repay it by the end of fiscal 2021.