November 24, 2014
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Bankruptcy touted as good option for struggling municipalities

Contrary to the stigma it may carry, bankruptcy offers municipalities and the taxpayers the means to build a sustainable future, Robert Flanders told the winter meeting of the Rhode Island Statewide Coalition Saturday at the Radisson Airport Hotel.

Flanders said such consideration might have sounded outlandish as recently as five years ago – he wouldn’t have bought it – but as the receiver for Central Falls, he said it has given him the leverage to make change. Without filing for bankruptcy through the Chapter 9 process, Flanders said he was powerless to change the contracts that put Central Falls in an untenable position of facing escalating pension and benefit costs its taxpayers would be unable to pay.

“It can immediately bring all the changes necessary to balance a budget from day one,” he said of bankruptcy. With a corrective plan worked out ahead of time, he said, the “bleeding” is stopped and the municipality is empowered to reject those contracts in place as well as select those it wants to keep.

Flanders called bankruptcy “the only vehicle to take a city into this…it is really a restructuring.”

And while municipal employees and retirees surely don’t want to see a reduction in their benefits, Flanders said, there aren’t really options.

“It’s either a hair cut or a beheading,” he said.

Flanders was the lead-off speaker and moderator for the discussion: “Decision 2012 for RI cities and towns: Ruin or recovery?”

And he had the ear, and to some degree, the endorsement of panelists Woonsocket Mayor Leo Fontaine, Cranston Mayor Allan Fung, fiscal advisor to the Providence Council Gary Sasse and Rep. Larry Ehrhardt, deputy majority leader and a member of the House Finance Committee.

“So why is it that this [bankruptcy] is a bad thing? It is something we ought to be doing,” said Flanders. He argued that people want to live in a city that can meet its debt obligations.

“It doesn’t make any sense to conventional wisdom that it’s a bad thing. It’s a good thing.”

Flanders debunked the argument that bankruptcy would prompt a downgrading of bond ratings, prompting interest rates to soar for the state and other municipalities and, in the long run, overburdening the taxpayer. He said that legislation protects bondholders, giving them security and, as has been shown, bond ratings across the state have not been affected by Central Falls.

And he reasoned federal bankruptcy court is preferable to state courts.

“Guess what,” he said, “You aren’t in front of judges with the biggest pensions of all.”

There were laughs and applause.

Fontaine said municipalities have become “victims of their own good intentions” and they are now collapsing under the weight of all those promises. He called for reform in entitlement programs, which also got a cheer from the audience of about 150, suggesting “we have got to help ourselves before we give away the store to everybody else.”

In response to questions from the audience, there was consensus that mandates – school bus aids and minimum manning requirements for firefighters were two cited – need to be addressed and that school expenditures be directed by city administrations. There was also concern over the impact of the extension of binding arbitration, which is the subject of legislation before the General Assembly again this year, and the provision to have contracts extend beyond their expiration and until a new one is in place.

Fung warned that Cranston “isn’t out of the woods.” He said that pension benefit costs represent 25 percent of the city budget, they are growing and that is not sustainable.

Following the meeting, Fung said he isn’t prepared to choose the path of bankruptcy at this point. He would rather see legislation that would enable mayors and town administrators to address issues such as pension benefits and “wall off” areas where municipalities can make changes to bring their budgets back in line.

Sasse said, “If we have a sick capital [Providence] we’re not going to have a healthy state.” Yet, after outlining the financial challenges of the next five and ten years, he came to the conclusion, “bankruptcy may be the best option.”

“The city can’t afford to pass the kind of tax increases [needed],” he said.


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