Woonsocket is latest to weigh bankruptcy option

Bankruptcy is no easy way out for Rhode Island’s cash-strapped cities and towns, and taxpayers should not see it as a way to avoid a rate hike, according to two legal experts.
“It would be a mistake to think tax increases would not be a part of a state restructuring plan,” said Robert G. Flanders Jr., who serves as receiver in Central Falls, at this point the only community in the state to petition for bankruptcy protection. “There’s a lot of pain and difficulty to slog through. … When I talk about restructuring, I’m talking about cutting spending, and the biggest part of restructuring is cutting personnel.”
Michael A. Kelly, the Providence lawyer who challenged the law that allowed a receiver to take over Central Falls, called it “total authority, a dictatorship really. There’s no legislative branch, no executive branch. The mayor, the city council, all the city boards and agencies, they’re reduced to an advisory capacity.”
The two lawyers shared their opinions recently, during separate visits to Woonsocket, another Rhode Island community where the state could take control of finances. The once-bustling mill city is facing a $10 million budget deficit, and sometime this spring property owners will likely be hit with an extra tax bill that will boost the rate by 13 percent.
That prospect has many homeowners loudly demanding the city quit trying to straighten the mess and instead dive straight into bankruptcy.
“I tell you, 50 or 60 percent of the people in Woonsocket can’t afford to pay the supplemental tax,” City Councilor Roger Jalette, one of the few elected officials to endorse filing for bankruptcy, said at a recent meeting. “Most people I talk to want to go with a receiver. He can make the cuts we can’t.”
To ensure city residents understand that route and its consequences, the Woonsocket Taxpayers Coalition invited Flanders to the city late last month to speak to their members and the public. That prompted the City Council to ask Kelly to offer a different perspective with a presentation at City Hall. What they had to say applies to communities across the state. The nation’s municipal meltdown has pummeled Rhode Island.
In East Providence, city finances are now under control of a state-appointed budget commission. The governor’s office is warning that in addition to Woonsocket, West Warwick, Pawtucket and Providence are headed in the same direction. And according to Flanders, as many as 16 municipalities now qualify for some form of state intervention.
Standard & Poor’s Ratings Services last week lowered its long-term rating and underlying rating on Providence’s general-obligation debt, citing the city’s “deteriorating fund balance and liquidity position, intractable pension-liability growth and optimistic 2013 budget assumptions.”
In his visit to Woonsocket, Flanders warned that receivership and bankruptcy should be a last resort. “In no way is it a panacea,” he said. “You can’t pick and choose how you restructure. It’s no cafeteria plan. A receiver might come in and say, ‘We can’t afford a library, we can’t afford a community center.’ “
Only a state-appointed receiver has the authority to petition a federal judge for bankruptcy protection. And the state could also opt for a less-intrusive form of intervention, such as appointing an overseer, who serves as little more than a financial adviser, or a budget commission, which wields slightly more authority. Even when a receiver takes the reins, he can only turn to bankruptcy as a last resort.
That final step is the only way a receiver can lay off union members, change their contracts or cut pensions and other post-retirement benefits.
In his presentation to the Woonsocket City Council, Kelly proposed several steps city leaders could take to speed up the bankruptcy process and make it less painful, a plan he called “pre-packaged bankruptcy.” As a first step, he suggested city officials establish a relationship with a sympathetic lawyer or consultant, preferably someone from the community. If need be, they can present that person to the governor as a candidate for the receivership post.
“The governor has the authority to appoint anybody,” Kelly said. “It doesn’t have to be a lawyer. Someone who knows your community would be more palatable.”
Step two would be for city leaders to make some big cuts before the receiver steps in. He suggested they use the threat of receivership to bring unions to the negotiating table.
“Move as quickly as you can to get to the bottom line,” he said. “Then once the receiver is in place, he has the hammer.”
Fast action could help a city save on both operating costs and fees to the receivership team, which can reach into seven figures. “Drag your feet, and during that time you’re paying for all the things you can’t afford, like benefits and contracts,” Kelly said.
Flanders, however, isn’t sold on the notion that a city can have that much influence on the process. In Central Falls, he noted, taxes climbed 19 percent, the city lost one-third of its employees, and retirement benefits for current and former city workers were cut by 55 percent. The library also closed for a time, until a newly formed nonprofit group took over operation.
“Another negative is that it’s expensive,” he said. “You need labor lawyers and actuaries to calculate pensions. A lot of professionals are involved.”
But there’s an upside as well, according to Flanders. “It could cost you $2 million, but you could save $6 million a year,” he said. “It’s a temporary fix that can push the reset button.” •

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