Rhode Island lawmakers are considering a package of bills related to municipal bankruptcies.

The action takes place against the backdrop of Central Falls’ financial troubles, Moody’s Investors Service dropping of the state’s credit outlook to negative from stable, and analysts placing capital city Providence’s A3 general obligation bond rating on review for a possible downgrade.

The city has about $88 million of outstanding parity debt, according to Moody’s.

The Senate has approved a proposal requiring municipalities to guarantee lenders first rights to their property taxes and general revenue, should they file bankruptcy.

Finance Committee chairman Daniel DaPonte, D-East Providence, introduced the bill on behalf of Gov. Lincoln Chafee, an independent whose administration seeks to strengthen municipal bankruptcy-related laws passed last year.

Under DaPonte’s bill, which the House is now considering, cities and towns must pledge their ad-valorem property tax and general fund revenues to payment on all GO bonds and notes.

DaPonte said the aim is to assure that municipalities with sounder balance sheets could access credit markets.

“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,” he said in a phone interview.

The city, with a population of just under 20,000, has been in receivership since May 2010.

“Central Falls is troubling, but Providence and other communities throughout the state are facing fiscal challenges, too,” DaPonte said.

Moody’s on Friday warned that it could further downgrade the rating on $88.2 million of Providence’s GOs to the Baa category, depending on the outcome of its fiscal 2012 budget. Moody’s on March 16 had dropped that rating to A3 from A1.

The city, with a population of about 172,000, faces an estimated $110 million structural deficit for fiscal 2012. Its fiscal 2011 budget required $41 million to balance operations.

According to Conor McEachern, an analyst with the U.S. public finance group at Moody’s, Providence’s fiscal 2012 budget relies on $55 million worth of cost-cutting and state aid that has yet to materialize. “There are a number of items that are subject to collective bargaining and General Assembly approval,” he said Monday.

The Rhode Island League of Cities and Towns, which lobbies on behalf of 39 municipalities, opposes DaPonte’s measure.

“We have lived by full faith and credit for 50 years,” said Peder Schaefer, the league’s associate director. “We think it’s overkill. We think the bondholders are protected adequately.”

The Senate last week also sent to the House two other bills that are part of Chafee’s bankruptcy legislation ­package. They would indemnify any fiscal overseer when that person takes over a ­municipality from prosecution or liability under any civil or misdemeanor criminal laws while performing public duties, except in cases of intentional malfeasance.

McEachern said that while many cities and towns in Rhode Island face budget pressures, “the Central Falls situation is a little different. Central Falls is dealing with a unique set of circumstances.”

While lowering Rhode Island’s outlook, Moody’s affirmed the Aa2 rating on the state’s GOs. The agency cited “the potential impact of rapidly escalating pension costs on the state’s ability to ­increase its liquidity margins, diminish its reliance on one-time measures to balance its budget, and reduce its debt burden.”

The state’s current pension liability is $6.8 billion, adjusted up from $4.9 billion in April after the Employees’ Retirement System of Rhode Island approved a new set of assumptions about the pension system. The changes include lowering the expected rate of return from 8.35% to 7.5%, a drop in the inflation rate from 3% to 2.75% and an increase in the life expectancy rate for retirees.

“The state’s pension costs are set to double in two years by an amount that roughly offsets its budget reserve account, raising the likelihood that it will continue to face significant budgetary pressures and fail to achieve the fiscal breathing room needed to sustain a financial position commensurate with other Aa2-rated states,” Moody’s said in its report.

Senior analyst Marcia Van Wagner said that while there is time for the state’s leaders to fix the problem, they must move soon. “I don’t know if there’s a cliff, but we clearly have a situation that could deteriorate.”

Rhode Island General Treasurer Gina Raimondo, a Democrat who like Chafee took office in January, said in a report issued two weeks ago that the annual cost of the pension fund could skyrocket to $1 billion by fiscal 2022. Citing a Boston College study, Raimondo said the retirement plan for state employees and teachers could run out of assets between 2019 and 2023.

“Rhode Island’s pension plans provide neither security nor financial sustainability and are in dire need of redesign,” Raimondo said in her report, titled “Truth in Numbers.”

Meanwhile, state Sen. John Tassoni has filed a bill calling for a forensic audit of school district finances in Central Falls.

“It’s been building up,” Tassoni, a Smithfield Democrat, said in a phone interview. “Documents I have received from an anonymous source have raised some eyebrows.” He said a district worker gave him a copy of a purchase order and invoice for a time-clock sheet that totaled nearly $100,000.

“The information I have is that it’s not even being used,” he said. “It’s unfortunate we have to go this route, but the best thing is for the Board of Regents to do an audit and wait and see what comes out of it.”

The Board of Regents oversees elementary and secondary education in Rhode Island. Central Falls’ school district has been entirely state-funded since 1991.

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.