It’s the end of the solvency road for Central Falls, Rhode Island.
Bloomberg reports today “Central Falls, Rhode Island’s poorest city, sought Chapter 9 bankruptcy protection as it struggles to meet pension obligations.”
In a move that will most-likely be repeated over-and-over-again in cities across America in the coming months and years, city officials decided that “the current situation is dire, and necessitates decisive steps to put the city back on a path to solid financial footing and future prosperity,” thereby making Central Falls the 5th city to file Chapter 9 in the United States (compared with 6 in all of 2010). In fact, “The city’s plight echoes an imbalance found in other municipalities across the U.S., including Vallejo, California, and Harrisburg, Pennsylvania,” where local governments have struggled (and failed) to match pension and cost savings with shrinking economies.
So…what drove this once unthinkable action?
A story seemingly as American as, well…you know.
Starting in the 1970s, with the departure of manufacturers, including several textile makers, Central Falls’ economy began failing; 20 years later, “from 1997 through 2009, at least 11 textile plants closed, eliminating almost 1,400 jobs.” In a city with a current population of approximately 19,000, Central Falls never fully recovered from this economic hit, earning the title “Cocaine Capital of New England” in a (1986) Rolling Stone article. By the early 1990s, “the state had taken over the city’s schools, including 100 per cent of the funding.”
Fast-forward to the 2000s, and Central Fall’s seemingly inevitable march toward bankruptcy continued as “Rhode Island slashed other local aid to cope with the financial crisis and the recession it spawned.” By 2010, the city had, according to Moody’s, about $21 million of debt outstanding. And today?
According to court papers, “The city had ‘no option’ except seeking Chapter 9 bankruptcy protection after service cuts and the unsuccessful effort to curb labour and retiree costs.” Furthermore, “Central Falls has a structural budget deficit of about $5.6 million on an annual general-fund budget of about $16.4 million.” And, in fact, by Aug. 31, 2011, the city will run out of cash, making it insolvent; this is in addition to possessing an unfunded liability of about $80 million for pensions and other benefits.
The case of Central Falls is a vitally important one for us to study: for while Chapter 9 may seem the last step off the financial cliff for many cities across the United States, we now find ourselves asking…what’s the better alternative?