Rhode Island Scrambles To Reassure Investors As Central Falls Slides Toward Bankruptcy

central falls rhode islandCentral Falls City Council President William Benson, Jr.

Photo: AP

We have been closely following the dire financial situation in Central Falls, R.I., as the tiny cash-strapped city teeters closer to municipal bankruptcy.Today, the New York Times‘ top pension reporter Mary Williams Walsh takes a look at how a Central Falls bankruptcy could have disastrous ripple effects across the Ocean State.

Walsh writes:

Some analysts fear that a Central Falls bankruptcy, and a whiff of other problems out there, could scare nervous investors away from bonds issued by Rhode Island’s other municipalities, perhaps setting off a chain reaction that could push the state itself to the brink. There is a precedent: the last American state to default on its bonds, Arkansas in 1933, got in over its head by trying to help struggling municipalities.

To recap: Central Falls, which has a population of just 90,000, is drowning under $80 million of unfunded pension liabilities. If the town cannot win at least $1.7 million in concessions from its union retirees, the city will be forced to consider filing for Chapter 9 municipal bankruptcy protection. The pension funds are currently projected to run out by October.

In an effort to calm investors, Rhode Island lawmakers recently passed a law that gives general obligation bonds priorities over all other payments, including pension payments. The bill requires municipalities to raise property taxes as much as necessary to make their debt payments.

Walsh points out that Rhode Island is not in any position to bail out its cash-strapped municipalities, not least because the state is being crushed by a $6.8 billion pension debt. Recent studies indicate that one in four of Rhode Island’s 36 cities and towns — including Providence — are struggling with huge debt burdens, and 23 of the state’s 36 local pension funds are at risk.

As we have noted, Chapter 9 municipal bankruptcy is still relatively rare — there have only been 46 muni bankruptcy filings since 1980. It is not clear exactly what the consequences of a Central Falls’ bankruptcy would be — or even if it would solve the city’s pension woes  — but it is likely the entire state of Rhode Island would suffer as a consequence.

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