Chocolateville

Chocolateville, as it was originally known, the old mill town in Rhode Island known today as Central Falls is on the Phoenixial verge of exiting Chapter 9 municipal bankruptcy as early as next week! Current receiver, Ted Orson, in a joint interview with Rhode Island Revenue Director Rosemary Gallogly, notes: ―One of the reasons why we were successful was that we had very clearly set out goals. We took a city with one of the worst possible financial profiles and in 13 months, will hopefully emerge with five years of balanced budgets and sustainable pension and OPEB [other post-employment benefits] systems by court order.‖ U.S. bankruptcy judge stated that U.S. bankruptcy Judge Frank Bailey has scheduled hearings for Sept. 6 and 7 in Providence. The city had an $80 million unfunded pension liability when it filed a year ago August 1st—leading the city‘s original receiver, retired state Supreme Court Justice Robert Flanders, to negotiate 55% cuts in pension benefits for retired police officers and retirees. The recession devastated the city‘s revenues: according to Moody‘s, assessed values there dropped 34% in fiscal 2011. In recounting keys to emerging from municipal bankruptcy, receiver Orson noted the critical support of the state: ―One of the reasons why we‘re so close to exiting bankruptcy is the extra attention we‘ve gotten from the leadership. They profoundly understood the problems that a city faces. Both of them understood the goals and never wavered from the problem. There was no ego, no attitude,‖ specifically referring to Governor Chafee and Ms. Gallogly. Two Rhode Island laws made it easier for Central Falls. In 2010, the state passed the Fiscal Stability Act, which created a three-tiered system of state intervention—intended to protect all Rhode Island communities‘ bond ratings from potential fallout. Subsequently, the General Assembly passed a law giving bondholders priority lien on property taxes and general fund revenues in any Chapter 9 filing. Moody‘s, noting the city‘s progress, placed its general obligation rating on review for upgrade last month, although Moody‘s Vito Galluccio warned that Rhode Island municipalities still face serious challenges: ―Although there has been some stabilization and helpful intervention from the state, we still expect some challenges for cities and towns,‖ he said, citing a slow recovery, stagnant tax bases, property tax cap limits and a high unemployment rate: ―They‘ve been proactive, but there are still a lot of risks and we will continue to monitor them.‖ Receiver Orson called the Central Falls case a game-changer: ―It changes the communication that cities have with their stakeholders. Before Central Falls, when cities negotiated with stakeholders, there was a strong feeling that cities did it without an ‗or else‘. Central Falls has made it very clear, at least in Rhode Island, that there is an ‗or else.‖ The city cleared a big legal hurdle last week, settling with former police chief Joseph Moran 3rd, who had sought to reclaim his job. Chief Moran, according to the Providence Journal, agreed to accept an unsecured claim of $75,211. Last week, Central Falls teachers‘ union agreed on a two-year collective bargaining agreement. Part of the difference in Central Falls, some believe, is that the city went into Chapter 9 with a plan rather than simply tumbling into it chaotically. Revenue Director Gallogly notes: ―We‘re trying not to brag, because a lot of people got hurt by this bankruptcy,‖ but Natalie Cohen, a managing director and head of municipal research for Wells Fargo Securities in New York, said Rhode Island communicated effectively:―We applaud the state‘s officials for an education campaign that focused on the civic importance of maintaining the future quality of life in the state, rather than depleting personnel and services.‖ Ms. Gallogly said transparency and education were essential to offset possible distrust toward the state: ―We wanted to make it clear that we weren‘t going to do any more than we had to. The power given us under the Fiscal Stability Act is something we take very seriously. We make the tough decisions, but if there‘s something we have to do, we do it without taking it to the next level.‖

Rhode Island Blue

Rhode Island Gov. Lincoln Chafee, in an interview with the Bond Buyer, looked back at key steps the state has taken to work with local governments in severe fiscal distress—and his efforts to address pension obligations—especially the challenge and importance of a special legislative session late last year in which the legislature enacted a landmark pension overhaul bill: ―The General Assembly convened a special session on pensions. I can‘t remember — ever — a special session on one topic…Sometimes they come back to confirm judges. But they returned in the fall just to tackle this one issue. Tunnel vision, no trading of votes.‖ Gov. Chafee and General Treasurer Gina Raimondo had worked together to sell the pension overhaul to lawmakers and to citizens at town hall meetings. The Governor stated that the special session, and the state retirement board‘s lowering of the assumed rate of return for the pension fund in a narrow vote that year to 7.5% from 8.25%, were key to enabling the legislature to pass the Retirement Security Act. Measures include suspending retirees‘ cost-of-living adjustments until the pension system is 80% funded and moving most current employees into a hybrid plan that combines traditional defined-benefit plans with 401(k)-style plans. (The pension bill faces a court challenge from unions. A loss in the suit could cost Rhode Island ―hundreds of millions‖ of dollars.) Officials say the bill will enable the state to trim its $7 billion unfunded pension liability by $3 billion. Both the state and local governments have confronted epic challenges: the state has experienced a 37% drop in manufacturing jobs from 2001 to 2011--the greatest decline among states, according to the BLS. Rhode Island‘s 10.8% unemployment rate is second only to Nevada‘s. Meanwhile, the state‘s cities and towns have been undercut by both stagnant tax bases and a property tax cap that limits municipal revenue streams. Analysts and government observers alike say few governors if any have spent as many hours on municipal matters. ―Rhode Island has been a relatively bondholder-friendly state and oversight is helping the distressed communities. It seems to have helped the most troubled communities — Central Falls, Woonsocket and East Providence,‖ said Naomi Richman, a managing director at Moody‘s.