Chocolateville

Former Central Falls Mayor Charles Moreau agreed to a plea agreement admitting guilt to federal charges that he accepted illegal gratuities from a friend and political supporter who received lucrative work from the city boarding up abandoned buildings. Earlier Mr. Moreau resigned as mayor, a post to which he was first elected to in 2003; he now faces a prison sentence. Between 2007 and 2009, the friend, Mr. Bouthillette, a businessman who specializes in post-disaster cleanup work, boarded up at least 167 Central Falls homes, reaping “unreasonable profits, amounting to hundreds of thousands of dollars,” according to federal court papers. As a “reward,” Mr.  Bouthillette “on three occasions corruptly gave Mayor Moreau things of value,” according to the federal information, charging the two men with two counts of fraud. Mr. Bouthillette helped former Mayor Moreau buy a new furnace for his house in Central Falls, provided free renovations to his home in Lincoln, and, in April 2010, provided free flood remediation work at the Lincoln home after heavy spring flooding that year. The information describes how Moreau circumvented competitive-bidding rules by declaring that each vacant home was an “emergency.” Moreau directed city officials to find vacant buildings to be boarded up, and identified buildings himself. He reduced the time the city gave property owners to board up their own homes from seven days to 24 hours. Some homes were boarded up even though people were still living there. Others were re-boarded by Mr. Bouthillette at Moreau's direction, even though the owners had already had their own contractors board the building. Under the plea agreement, Moreau agrees to pay a fine of at least $6,400. For his part, Mr. Bouthillette agrees to contribute $160,000 to the government, which “shall be used to make grants for educational, public safety, social services or housing programs in Central Falls that redress the harm caused by the defendant's criminal conduct,” and he agrees to relinquish to the city any further monies he is owed for boarding up properties, which is estimated to be about $277,000. The young upstart clashed several times with the experienced former mayor during two marathon debates on Sunday afternoon at the Forand Manor and Wilfrid Manor on opposite sides of the city. 

Meanwhile, James Diossa, a city councilman,  won a big victory in Central Falls' nonpartisan mayoral primary on Tuesday and will move on to face former Police Chief James Moran in the general election next month. Mr. Diossa had  battled with ex-Mayor Thomas Lazieh over the Donald W. Wyatt Detention Facility which has not provided the city with a dime in almost four years. In the past, the jail used to pay the city as much as $525,000 for allowing it to operate in the city. Lazieh boasted that he was responsible for bringing the facility into the city and creating jobs. Diossa went right after the former mayor, blaming him for signing off on a deal that required the bondholders to get paid before the city.

Chocolateville

The Bill & Melinda Gates Foundation has its eye on the Central Falls public schools and area charter schools once again, touring the school district and meeting with the leaders of the charter schools. Central Falls was one of three districts to receive support from the Gates Foundation last fall to collaborate with area charters to improve student achievement. The public schools are partnering with the Learning Community, Blackstone Valley Prep, the Segue Institute for Learning and the International Charter School. Gates is exploring whether to provide grants to this partnership for, in this case, capital improvements.

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.

Chocolateville Success!

The U.S. Bankruptcy Court for the District of Rhode Island yesterday afternoon approved the Chapter 9 municipal bankruptcy reorganization plan and consequent exit from bankruptcy Central Falls, just 13 months after the city filed for bankruptcy. U.S. Bankruptcy Judge Frank Bailey stated he would issue an order later formally implementing the restructuring plan. Only two of the 239 creditors voted against the plan, which would take effect in 44 days, after an appeal period. In issuing his decision, Judge Bailey stated: “Rarely does the shoe fit quite as cleanly as the shoe fits in this case, where we have had a community of pain for 13 months. From pain, it’s my sincere hope that from the confirmation of this plan of adjustment, the parties will be able to join together now in a healing process with a healthy financial community…This case was filed 13 months ago. In my limited knowledge, this is the fastest case to go in this history of Chapter 9, of real municipalities, to go from filing to confirmation…This is a record time and record efficiency. In a way, I think that this is an example not only for Rhode Island but maybe the nation on how to run a Chapter 9.” Under the agreement, Rhode Island, which seized control of the 19,400-population city more than two years ago, would transfer operations back to local officials in January. State officials could still intervene if the city fails to meet budgetary benchmarks (Rhode Island enacted fiscal distress legislation establishing a three-tiered intervention system for distressed municipalities and granting bondholders priority in a bankruptcy filing.) In addition, the U.S. Bankruptcy Court retains jurisdiction for the first five years. In the wake of yesterday’s decision, Rhode Island Governor Lincoln Chafee said: “As a result of this plan, the city will have a balanced budget until 2017 including a sustainable pension and healthcare system for retirees.”

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.