Moody's Investors Service late Thursday upgraded the rating of former bankrupt city Central Falls, R.I., to B1 from B2, affecting $13.7 million in outstanding general obligation bonds.

The outlook remains positive.

“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,” Ted Orson, the city's bankruptcy attorney, said in an interview.

A 2011 state law made the bondholders whole in the bankruptcy.

“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 Friday morning.

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, an 18,000-population city 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 approved the city's six-year financial plan and exit from Chapter 9 last September. The plan balances budgets through 2017.

"The bankruptcy process has resulted in a significant reduction in the financial pressure related to employee salaries, pensions and healthcare," Moody's said.

Moody's, however, 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.

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