Central Falls, R.I., exited from bankruptcy in a mere 13 months. Whether Judge Frank Bailey's assertion last week in Providence that the 19,000-population city's reorganization could serve as a national model remains an open question.
"That's hard to say. Every case is different," Roberto Kampfner, a financial restructuring and insolvency partner with White & Case LLP, said in a telephone interview from Los Angeles. "It's a different game out here. I don't know if you'd have a similar type of solution than that in Rhode Island."
California is home to three communities that filed for bankruptcy over a two-week span this summer: Stockton, Mammoth Lakes and San Bernardino.Vallejo, Calif., which filed bankruptcy in 2008, took more than three years to emerge from Chapter 9. Central Falls bankruptcy attorney Ted Orson agreed with Kampfner.
"Municipal financial cases are different. Certain other cities have bond problems that are so much different than Central Falls. Here, it involved GO bonds. In Stockton, you have pension bonds," said Orson, a name partner in Providence firm Orson and Brusini Ltd.
"We believe everything went extremely well," he said. "We achieved what we set out to do."
Central Falls exits Chapter 9 with a six-year plan, fiscal 2012 included, that includes balanced budgets. Cuts were painful - retired police officers and firefighters saw their pension benefits cut 55%. Bondholders remained whole and the city has made its bond payments on time. "While we are thrilled to return to fiscal stability, we do so with a heavy heart," Orson said.
Bailey, assigned to the case from the Boston bankruptcy court, drew widespread praise for his brisk handling of the case.
"Judge Bailey did an extraordinary job from beginning to end," Orson said. "On the first day, he said - on the record - that if the case moved slowly, it would not be because of him. He promised to move quickly and did exactly that."
The judge, a former commercial litigator with Sherin and Lodgen LLP in Boston, has served on the Boston bench for four years. Chief Judge Sandra Lynch of the U.S. Court of Appeals for the First Circuit assigned Bailey to the Central Falls case one month after he signed off on a Chapter 11 exit plan by Molecular Insight Pharmaceuticals Inc.
"I have to give credit to state officials in Rhode Island," Bailey told the court, citing laws that created an intervention system for distressed municipalities and gave bondbolders priority in a Chapter 9 filing.
Orson has repeatedly praised state officials, notably Gov. Lincoln Chafee and revenue director Rosemary Booth Gallogly. "What made Central Falls unique was the involvement by the governor, the revenue director and the General Assembly. That made it easier for us to go into the case with clearly defined goals," Orson said.
State officials elsewhere, notably Pennsylvania - home to teetering cities Harrisburg and Scranton, and 25 other communities labeled distressed - have come under fire for their handling of local matters.
"There are a lot of states in which the governor will say, 'This is your problem.' That's foolish. What is a state? It's built on its cities. It's a group of cities combined together. If cities fall, the states will suffer," Orson said.
Uncertainty, though, still exists at the local level in Central Falls. "We're writing on a tabula rasa here," Bailey said.
"A lot of this Chapter 9 is terra incognita," Lawrence Goldberg, who has served as special counsel to some members of the Central Falls City Council, told the court last week. "Little is known about what needs to be done or what should or should not be done."
The recovery plan transfers daily operations of the city from the state back to local officials in January, though Gallogly will make the final determination.
Moody's Investors Service placed the city's Caa1 rating on review for upgrade in late June. Moody's expects to complete its review later this month.