A Rhode Island judge Monday upheld the constitutionality of the law allowing the state to appoint a receiver to take over the finances of troubled Central Falls.

Superior Court Judge Michael Silverstein rejected claims by the mayor and a majority of the City Council that a recently enacted law wrongly allowed the receiver to effectively remove them from office without due process.

“We are pleased with the rulings, which allow us to move forward in our efforts to restore fiscal stability to the city of Central Falls,” receiver Mark Pfeiffer said in news release.

“The court’s decisions make it clear that the receivership process is constitutional and in the best interests of both Central Falls and the state of Rhode Island.”

In a 48-page decision, Silverstein wrote that the receiver had acted within the authority of the new law — the Act Relating to Cities and Towns: Providing Financial Stability — and granted permanent injunction against challenges to the receiver’s authority by the elected officials.

A lawyer representing four of Central Falls’ five City Council members said they may appeal the ruling to the state supreme court.

In July, Gov. Donald Carcieri and Department of Revenue acting director Rosemary Booth Gallogly  appointed Pfeiffer, a retired superior court judge, to take over from a court-appointed temporary receiver who had been in charge of Central Falls’ finances since May.

Pfeiffer assumed the powers and duties of the mayor and relegated the existing mayor, Charles Moreau, to an advisory function. Central Falls went into judicial receivership in May after projecting a $3 million shortfall in its nearly $18 million fiscal 2010 budget, along with a $5 million budget gap for fiscal 2011.

Part of the revenue shortfalls were due to overoptimistic projections for payments to the city by the Donald W. Wyatt Detention Center, which is operated by the quasi-public Central Falls Detention Facility Corp., which issued $109.9 million of unrated bonds for the center in 2005.

The city’s debt was subsequently downgraded to junk by Standard & Poor’s and Moody’s Investors Service.

Those developments prompted Rhode Island legislators to enact a law that prevents municipalities from going into receivership on their own and establishes a system for state intervention in fiscally distressed cities and towns.

Conflict between the receiver and local elected officials flared almost immediately when the officials sought to hire attorneys and a dispute occurred over who had the right to make government appointments.

Both sides filed motions for temporary restraining orders against the other and sought a ruling on the constitutionality of the law. Attorneys for Moreau and City Council members had argued that the act was too broad and violated constitutional guarantees of local rule.

Silverstein ruled that state lawmakers were within their rights to enact a law that provided for state interference in fiscally distressed municipalities’ governance because the instability of one government can have a negative impact on others and the state as a whole.

“The court holds that the act applies alike to all cities and towns, addresses a statewide concern, does not alter a municipality’s form of government, and is substantially related to public welfare,” Silverstein wrote.

He also ruled that since the act envisioned a temporary appointment of a receiver, albeit without an explicit term, the elected officials had not been removed from office.

The City Council members’ attorney, Lawrence Goldberg, said an appeal could come as early as this week. The relegation of elected officials to an advisory capacity made it unclear what roles they actually had and how the city would be run, he said.

“If they serve only in an advisory capacity and when they’re not acting that way they’re violating the act — purportedly — it would seem to make it very difficult for them to do anything,” Goldberg said.

Moody’s last month said the city was still on review for a possible downgrade from its current B3 rating on $23.4 million of outstanding general obligation debt due to its “weak credit profile, insufficient cash flows, and continued reliance on market access to finance operations and debt service.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.