By Ryan C. Wood
On August 1, 2011, The City of Central Falls, Rhode Island, made history by joining the short list of municipalities to file for bankruptcy protection under Chapter 9, Bankruptcy Case No. 11-13105. Central Falls joins another recent municipal bankruptcy that is wrapping up, The City of Vallejo, California. Central Falls will have to rely upon some of the rulings from the City of Vallejo case given that few municipalities have actually filed under Chapter 9 of the bankruptcy code. This result in little case law or precedent to help guide Central Falls through this process. Central Falls is facing a $5.6 million shortfall for fiscal year 2012 and their general fund will be depleted in August 2011. Hopefully municipal bankruptcy filings will not become common place in the United States. Unfortunately the reductions in Federal spending, reductions in sales tax and property tax, reductions of other sources of income for local governments do not make the outlook very good.
Like many individuals that have to file for bankruptcy protection under Chapter 7 or Chapter 13, Central Falls tried to stay out of bankruptcy court. Central Falls raised taxes on its population of approximately 20,000 residents a staggering 19.32% in 2011. Central Falls also restricted overtime pay, reduced the number of city employees eligible to receive benefits, eliminate benefits for part-time employees, closed the public library, closed the community center and even shared services with surrounding communities to try and prevent filing for bankruptcy protection. These drastic cuts in services and benefits to existing city employees still did not close the projected depletion of their general fund or $5.6 million budget shortfall.
On August 1, 2011, Central Falls filed a motion with the Bankruptcy Court seeking approval to reject collective bargaining agreements with the Central Falls Police Department Fraternal Order of Police, International Association of Fire Fighters Local 1485 AFL-CIO and the Rhode Island Council 94 American Federation of State County and Municipal Employees AFL-CIO Local 1627. According to Central Falls court documents this is the single most important step in getting their fiscal budget balanced and eliminating future shortfalls. Two of these three collective bargaining agreements expire in June of 2012 while one agreement has already expired. One of the requirements for a municipality to file for bankruptcy protection under Chapter 9 is that a good faith effort is made to negotiate concessions and try to reach an acceptable agreement prior to the bankruptcy filing. Unfortunately Central Falls and the unions were not able to agree on concessions that would provide enough cuts to allow Central Falls to stay out of bankruptcy court. The main issue to watch will be if Central Falls goes after the retirement benefits of retirees of the three unions. Time will tell.