Sometime in the middle of 2011, retired R.I. Supreme Court Justice Robert G. Flanders Jr., the receiver for the city of Central Falls, went to the city’s police and firefighters with what he called “the Big Ask” – a request that they accept deep cuts in pension benefits to help the city forestall bankruptcy. He was rebuffed.
On Aug. 1, Flanders returned with a big spoon of awful-tasting medicine and told the city: open wide. The medicine was a bankruptcy filing for Central Falls and cuts as deep as 50 percent for most city pensions. It was the only bottle that Flanders had left in his medicine cabinet.
The action was a benchmark: Central Falls was the first Rhode Island city to declare bankruptcy and significantly roll back city workers’ and retiree pensions. It was one of very few municipal bankruptcies ever in the United States.
But before bankruptcy could be filed, the General Assembly had to pass a law to permit it, which it did in 2010. A bankruptcy filing was imperative before the receiver – Flanders – could take authority from elected city officials; request concessions from city unions; and impose cutbacks.
Another piece of critical legislation sought by the administration of Gov. Lincoln D. Chafee, and passed by the General Assembly in 2011, sought to contain the contagion that the Central Falls bankruptcy could unleash. To prevent the municipal bond market from panicking, raising interest rates on Central Falls’ bonds, and forcing an increase in city tax rates, the legislature passed a law requiring bond holders to be compensated first in the event of a municipal bankruptcy.
That law was the first of its kind in the United States, said Flanders. “It was successful at tamping down fears and preventing interest rates from rising for municipal bonds,” he said.
None of this sounds like good news, but bankruptcy, Flanders noted, is the first legal step necessary before a receiver can force painful adjustments. The laws could be a game-changer in Rhode Island, where Central Falls’ problems are familiar elsewhere.
Is Central Falls a harbinger for other municipalities in Rhode Island? Several Rhode Island municipalities, including Warwick, West Warwick, East Providence and Pawtucket, are struggling with under-funded pension plans. In mid-November 2011 Chafee appointed a fiscal overseer for East Providence, which was $10 million in debt. It’s likely not to be the last.
“Other cities and towns of greater size than Central Falls are seeing extreme financial distress,” Flanders said. “Other cities and towns are going to go through a similar process.”
Daniel Beardsley, executive director of the Rhode Island League of Cities and Towns, said towns and cities have many problems in common. Beardsley agreed that “the Central Falls situation has raised the bar with regard to increased financial scrutiny of cities and towns by taxpayer groups. Central Falls opened people’s eyes to the fact that these problems cannot be kicked down the road.”
Some parallels to the endgame of Central Falls’ story occurred in late 2011, when the General Assembly, hammered by warnings of pending catastrophe from Chafee and R.I. General Treasurer Gina M. Raimondo, passed an unprecedented bill that significantly reduced pension benefits for retired, active and future state workers.
Flanders said he suspected that the Central Falls example goaded the General Assembly to pass the difficult vote for state pension reform. “Central Falls was the bloody shirt that kept getting waved to remind people what might happen is they did not act,” Flanders said. “It served as an example of how far things can go off the rails without action.” •
