‘Dire’ Finances Forces Rhode Island City Into Bankruptcy

August 01, 2011, 1:00 PM EDT
More From Businessweek

    SEC Auction-Rate Case Comments May Aid Investors
    Allstate Posts Loss on U.S. Storm Claims, Beats Estimates
    HSBC’s Victory May Cut $100 Billion Jackpot for Madoff Investors
    Ex-BofA Chief Lewis Loses Bid to Dismiss Securities Claim
    Marco Polo Seatrade Files for Bankruptcy in New York



By Michael McDonald and David McLaughlin

(Updates with Moody’s report in fifth paragraph.)

Aug. 1 (Bloomberg) -- Central Falls, Rhode Island’s poorest city, filed for Chapter 9 bankruptcy protection as it struggles to meet its pension obligations.

The petition was filed today after state officials failed to persuade unionized police, firefighter and municipal retirees to accept voluntary benefit concessions, according to a statement from Robert Flanders, a judge appointed to oversee the city’s finances. Flanders said he asked the court to reject existing collective-bargaining agreements with the unions.

“The current situation is dire, and necessitates decisive steps to put the city back on a path to solid financial footing and future prosperity,” Governor Lincoln Chafee, who joined Flanders in announcing the bankruptcy petition today, said in the statement. “We will be exploring all options to provide quality services at an affordable cost to all taxpayers.”

Central Falls, a city of about 18,000 located about 6 miles (9.7 kilometers) north of Providence, is the fifth municipal entity to file for bankruptcy this year, compared with six in all of 2010, according to data compiled by Bloomberg. The filing followed last week’s move by lawmakers in Jefferson County, Alabama, to postpone a vote on proceeding with what would be the biggest U.S. municipal bankruptcy.

Out of Assets

The Central Falls pension plan was expected to run out of assets by October without additional funding or significant concessions from both current employees and retirees, according to a June 17 report from Moody’s Investors Service. The rating company at the time lowered the city’s credit grade one level to Caa1, its 17th-highest of 21, from B3.

The pension’s obligations were $48 million greater than the fair value of its assets as of June 30, 2010, according to data compiled by Bloomberg. Central Falls in fiscal 2011 continued its practice of not making its required contribution to the municipal pension and drew on existing plan assets to pay benefits, Moody’s said.

Central Falls has about $21 million of outstanding debt, New York-based Moody’s said. The city’s per-capita income is 50 percent of Rhode Island’s, according to the company.

Gina Raimondo, the state’s treasurer, released a statement today saying she doesn’t expect the bankruptcy filing “to hinder the state’s ability to access the bond markets in the coming months.”

Frank Bailey, a U.S. bankruptcy judge in Massachusetts, will oversee the bankruptcy for the city, according to a court filing.

The case is In re City of Central Falls, 11-13105, U.S. Bankruptcy Court, District of Rhode Island (Providence).

--With assistance from Martin Z. Braun in New York Editors: Mark Tannenbaum, Andrew Dunn

To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.