The battle over the constitutionality of the Rhode Island law that allowed a receiver to take over Central Falls' finances and governance is back in court.
Central Falls went into judicial-appointed receivership in May after Mayor Charles Moreau and the City Council petitioned the court and said the city was insolvent. This action prompted Moody's Investors Service and Standard & Poor's to downgrade the city's debt to junk. Fearing that the receivership precedent could lead to more downgrades and spook investors, state lawmakers in June enacted a law that retroactively prohibited judicial receivership and created a new system for the state to intervene in distressed municipalities' finances.
In October, Superior Court Judge Michael Silverstein rejected claims by the mayor and four City Council members that the Act Relating to Cities and Towns: Providing Financial Stability wrongly allowed the receiver to effectively remove them from office without due process in violation of the state constitution. Pfeiffer, who was appointed in July, relegated the mayor and City Council to advisory status. The judge ruled that the new law did not alter the form of governance because it was envisioned as temporary, even though it did not specify a deadline.
The local lawmakers appealed the decision in a brief dated Dec. 6, arguing that a precedent case cited in Silverstein's decision, Marran v. Baird, was not applicable.
In Marran v. Baird, a judge upheld a law that allowed the state to impose a budget commission on West Warwick in 1994 to fix its fiscal problems. In that case, the judge ruled that the commission, which had a set term to the end of the fiscal year, did not alter the municipality's form of government because it was incidental and temporary.
The recent law does not set a time limit for a receiver's term or terms for other levels of oversight. The law also provides that the "powers of the receiver shall be superior to and supersede the powers of the elected officials of the city."
The appellants argued that these provisions give the state director of revenue — who with the governor appointed the receiver —"drastically greater power and discretion" than under previous state law.
Pfeiffer's brief argued that although the recent law did not set a time limit on receivership, the old law allowed the governor to reappoint the budget commission as needed. He also argued that the recent law's guidelines clearly defined standards of fiscal distress which include multi-year deficits, rating downgrades, failure to respond to state queries about its finances and lack of access to the credit markets.
"When circumstances creating the fiscal crisis are abated, a fiscal crisis will no longer exist and … the director of revenue will terminate support," the brief said.
The appellants also argued that their effective removal from office violated the separation of powers because it put executive and legislative powers into the hands of one person. Pfeiffer responded that they had not been removed from office and that regardless, the state constitution does not guarantee separation of powers at the municipal level. A court date has not been set for the case.
Last week Pfeiffer recommended in a report that Central Falls be annexed by the neighboring city of Pawtucket and receive state support because its fiscal problems were too deep to be addressed on its own. Alternately, Central Falls could regionalize services to share costs with other municipalities. If both options failed, Pfeiffer said the city might need to go into Chapter 9 federal bankruptcy.
Cumulative deficits over the next five fiscal years could total as much as $25 million for a city whose fiscal 2011 budget is $16.8 million, the report noted. Central Falls, which has a population of 18,928, has $23.4 million of general obligation debt outstanding.