Chocolateville

Model, Luck, State Leadership, or Luck of the Draw? Central Falls, R.I., exited from municipal Chapter 9 bankruptcy in13 months—leading U.S. Bankruptcy Judge Frank Bailey to state last week that the Central Falls municipal bankruptcy process could serve as a national model.  That, of course, would be a stretch. Chapter 9 is a unique provision in federal law which only permits federal bankruptcy protection for a municipality if a state enacts legislation—something that not only not all states have done, but also something which states have chosen to enact with different parameters. Moreover, not everyone—by any stretch of the imagination—would agree that the exit from bankruptcy by Central Falls is necessarily an unparalleled success, certainly not the city’s retirees. Third, there are circumstances unique to each city and county that confronts default. In almost no two instances will we find the same set of facts and circumstances. Jefferson County, Alabama is a prime example—where, as U.S. House Financial Services Committee Chairman Spencer Bachus (R.—Al.) stated this week, “[I]f this legislation (on imposing a federal fiduciary responsibility on Municipal Advisors) had been in place,” Jefferson County would not be where it is today.”

A key issue is not just the differences in state municipal bankruptcy authorizing legislation (if the state has even enacted such), but also what that legislation provides. It’s also that the facts and circumstances in almost every city and county are distinct. One friend likens what happened in Jefferson County to a criminal activity, whereas Central Falls and other cities have clearly fallen victim to severe, recession related drops in assessed property values—and others have borrowed beyond their means. Moreover, as we have seen, how states have chosen—or not chosen—to address severe fiscal distress in municipalities is a critical factor. In some instances, the problem involves bonds issued by the county or city backed by the full faith and credit of its taxpayers. In others, there have been different kinds of bonds—or singular backroom mismanagement. In Stockton, there were pension bonds. In Central Falls, the key involved deep cuts in pensions: the city  exits Chapter 9 with a six-year plan that includes balanced budgets, but at a cost of retired police officers and firefighters taking pension benefits of 55%, while bondholders remained whole and the city has made its bond payments on time. The resolution does not change the underlying poverty and distress in the city—and lack of a manufacturing base. It remains unclear whether a city of one square mile can long endure, or, as Judge Bailey wrote: “We’re writing on a tabula rasa here…” And Lawrence Goldberg,who has served as special counsel to some of the members of the Central Falls City Council, noted: “A lot of this Chapter 9 is terra incognita…Little is known about what needs to be done or what should or should not be done.”

It has been important to all the cities in distress—either in bankruptcy or in danger of default—that the state has taken an active partnership role. Or, as Judge Bailey wrote: “I have to give credit to state officials in Rhode Island,” citing laws enacted by the Governor and legislature that created an intervention system for distressed municipalities and gave bondbolders priority in a Chapter 9 filing, with many giving special credit to Gov. Lincoln Chafee and revenue director Rosemary Booth Gallogly. Judge Bailey: “What made Central Falls unique was the involvement by the governor, the revenue director, and the General Assembly. That made it easier for us to go into the case with clearly defined goals.” In contrast, both internal disagreements and inability to work together and a less supportive state relationship appear—at least so far—to have produced remarkably less successful outcomes in some states, notably Pennsylvania, where its state capitol, Harrisburg, along with Scranton, and 25 other communities labeled distressed - have come under fire for their handling of local matters. As one expert commented: “There are a lot of states in which the governor will say, ‘This is your problem.’”

Note to Chris Mc., Dan, Jim Spiotto, and others—this is an extraordinarily critical issue, so your feedback, perspective, etc. would be especially appreciated.