Will Rhode Island’s Central Falls Bankruptcy Roll Into Massachusetts?
The largest municipal bankruptcy is happening just outside of Massachusetts. Central Falls, Rhode Island, a city of 18,000, filed for Chapter 9 bankruptcy protection in Federal Bankruptcy Court. The filing was in the Massachusetts Bankruptcy Court, in Boston. The alleged culprit is the city’s pension plan: they promised much to city retirees and made no plan to pay for it. The city’s annual budget is just over $16 million, and the deficit is over $5 million.
The state of Rhode Island appointed a receiver, Robert Flanders, a bankruptcy lawyer from the law firm Hinckley Allen Snyder. A bankruptcy lawyer in a Chapter 9 case will submit a reorganization plan within 30 days. It is expected that the plan for Central Falls will involve cutting retiree benefits by 50%, which would save half of the $5 million deficit.
This is not news to the Central Falls city workers and retirees. They have been meeting and voting on various plans proposed by Mr. Flanders. When 141 retirees could not agree in a vote last week, the state appointed receiver was left with no option but to file for bankruptcy in Massachusetts court. As you can imagine, there is a lot of discontent, allegations of fraud and overreaching, and questionable acts.
The city has hired Kenneth Klee, of Klee, Tuchin, Bogdanoff & Stern. Mr. Klee worked on the Orange County bankruptcy in 1994. He was instrumental in rewriting the municipal bankruptcy law, back in 1975, when New York City was on the verge of bankruptcy. The significant portion of the law that he wrote was that the bankruptcy court could cancel union contracts with municipalities. While the city is fortunate to have such expertise, the expense of yet another lawyer, and yet another process, is not lost on taxpayers.
Jefferson County, Alabama, is having a similar bankruptcy issue. A sewer system that violated the Clean Water Act in 1996 was supposed to cost $1 billion to fix. The result was $3.2 billion in sewer bonds which now are, essentially, in default. In the event that they eventually file for bankruptcy protection, it would be the largest municipal bankruptcy since Orange County, California filed in 1994. Residents of Jefferson County pay $63 on average per month for use of the sewer system, apparently one of the highest rates in the country. The mismanagement includes JP Morgan which was an underwriter for the bonds, which paid $647 in penalties for bribing elected officials to secure the business.
Chapter 9 bankruptcies originated in the 1930s and there have been about seven per year since then. This is obviously a very low number, considering the number of cities in the United States. Further, many of the Chapter 9 bankruptcies are not municipalities at all, but sewer works and other municipal or public utilities. Already this year, six have been filed in the United States.
Does this mean there will be some in Massachusetts? We have no way of knowing. There do not seem to be any on the radar screens, or in the financial news. However, we will endeavor to keep our faithful followers appraised if any Massachusetts municipal bankruptcies emerge.