Gov. Lincoln Chafee has signed a bill requiring Rhode Island municipalities to guarantee that lenders get first rights to property taxes and general revenue, should the government entity file bankruptcy.
Under the law, which Chafee’s signature made official Wednesday, cities and towns must pledge their ad valorem property tax and general fund revenues to payment on all GO bonds and notes.
Supporters and a variety of observers say the measure is intended to minimize contagion, or a domino effect, in light of Central Falls’ ongoing financial troubles. Central Falls is north of Providence, near the Massachusetts border.
“There is a lot of concern about contagion, and states have a history of focusing on security for bondholders,” said Robin Prunty, managing director in the public finance ratings group at Standard & Poor’s in New York.
Finance Committee chairman Daniel DaPonte, D-East Providence, introduced the bill on behalf of Chafee.
“The legislation is intended to prevent a domino effect in the credit markets that could resonate through all the communities in Rhode Island, and even the state itself. We’re attempting to control the Central Falls situation as much as possible,” DaPonte said in an interview when he filed the bill.
The Rhode Island League of Cities and Towns, which lobbies for the state’s 39 municipalities, had opposed the measure, saying current laws pertaining to municipal borrowing are sufficient.
Central Falls, whose population is about 18,000, has been under state receivership since May 2010. It owes $80 million worth of retirement benefits to police officers and firefighters and could run out of pension money in October. State lawmakers knocked $6.7 million in aid for Central Falls out of the fiscal 2012 budget.
The new Rhode Island law “lends some sense of how the bankruptcy process will play out,” said David Narefsky, a partner in law firm Mayer Brown LLP in Chicago and that city’s former deputy corporation counsel. “If you’re a Central Falls general obligation bondholder, this is going to make you more confident. It also sends a message to non-bondholder creditors to be careful in your negotiations.”
Moody’s Investors Service last month downgraded Central Falls to Caa1 from B3, affecting $20.8 million of outstanding debt.
Municipal bond and legal experts say states are pushing back. “You have a possible contagion issue, an image issue, and a political issue, to name a few,” said Stephen Murphy, a Standard & Poor’s managing director.
“When New York had its crisis in the mid-1970s, New Jersey across the water was worried about being broad-brushed. That type of concern still exists today. Today, Dauphin County in Pennsylvania could have difficulties with the markets because of Harrisburg’s situation.”
Pennsylvania recently enacted a law, aimed at Harrisburg, that prohibited distressed small-to-medium-sized communities from filing for bankruptcy protection for 12 months, under the threat of losing all state aid. Harrisburg next week will decide whether to accept a proposed financial recovery plan under a state program called Act 47.