Central Falls, R.I., filed for Chapter 9 bankruptcy protection on Monday, becoming the fifth U.S. city to enter bankruptcy this year. Six cities declared bankruptcy in all of 2010, according to data compiled by Bloomberg.
The cash-strapped city had no options left after raising taxes, cutting services “to the bone” and failing to convince municipal retirees and current workers to accept cuts to their pensions and benefits, Robert Flanders, the state-appointed receiver overseeing the city’s finances, said at a news conference at City Hall, the Associated Press reports.
“The city’s financial condition has deteriorated to the point where it is insolvent,” Flanders said in the court filing, Bloomberg reports. “The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased.”
Central Falls has $80 million in unfunded liabilities for pensions and retiree benefits, but the city retirement plan has just $5 million in assets, Flanders said.
In June, Moody’s Investors Service estimated the Central Falls pension plan would run out of assets by October without additional funding or significant worker and retiree concessions, and rated the city a Caa1, below investment grade.
Flanders asked the federal court to immediately reject collective bargaining agreements with police and fire department employees. He plans to lay off city workers and reduce pension benefits in spite of retirees’ opposition, AP reports.
Cities generally do everything they can to avoid declaring bankruptcy because it makes it more difficult and more expensive to raise money via the municipal bond market. But, the Financial Times reports, Rhode Island passed legislation last month ensuring that bondholders of its cities and towns will be fully repaid even in the event of bankruptcy.
This has changed the dynamics of bankruptcy in the state, James Spiotto, a partner at Chapman and Cutler, told FT. “The hindrance to Chapter 9 [bankruptcy] was always concern about future access to capital. [Rhode Island] has taken that out of the mix,” he said.
Meanwhile, several more municipalities are mulling over declaring bankruptcy, according to AP. Last week, officials in Jefferson County, Ala., postponed a meeting to consider whether to go ahead with what would be the biggest municipal bankruptcy in the United States, but will discuss it again this week; Harrisburg, Pa., has also been considering the option.