Speaking of Central Falls (and Chapter 9)…December 28th, 2010 at 10:26 am by Ted Nesi under General Talk
In the first of this week’s five “Dear Mr. Chafee” essays, Tom Sgouros writes today about how the new governor should work to build a collaborative relationship with cities and towns in order to deliver a better government and avoid more crises along the lines of what’s happening in Central Falls.
Rhode Island isn’t the only place facing those issues, either. The New York Times reports that Hamtramck, a city in Michigan, is pleading with state leaders to allow it to file for Chapter 9 bankruptcy. But state leaders are firmly against the idea, saying they fear if they let one city file, 30 more will want to follow. And naturally, Central Falls gets a shout-out:
Bankruptcy, increasingly common among corporations and individuals, remains rare for municipalities. Local leaders who want to win elections find it unappealing and often have other choices for solving financial woes. Besides, states have a say in whether a municipality may pursue bankruptcy at all, and they have every reason to avoid such an outcome, not least of all for fear of a creating a ripple effect that could cripple the municipal bond market and drive up the cost of borrowing. …
This month, the authorities in Rhode Island said the City of Central Falls could face bankruptcy if immediate, drastic changes — perhaps the city’s annexation into a neighboring municipality — failed.
The specific details in the story will ring familiar to local readers. Hamtramck is a tiny city – 2.1 square miles. Its population has shrunk by half since peaking years ago at 50,000. It thrived as a manufacturing center. Pensions are described as overly generous. A big reason for its current troubles is a drastic drop in state aid, although in Hamtramck’s case there was apparently some sort of overpaying by the state government in years past.
Before anyone gets too excited about the benefits of local bankruptcy, though, it’s worth taking a look at what’s happened in Vallejo, Calif., a city of 120,000 outside San Francisco that filed for Chapter 9 in May 2008. The result hasn’t been all that beneficial for the city, Bloomberg News reported this month:
The lesson [officials around the U.S.] have taken from the two-year-old case, which has cost Vallejo $9.5 million in legal fees and made it a nationwide symbol for distressed municipal finances, is that out-of-court negotiations yield better results.
“They spent a lot of money with very little outcome,” said Jay Goldstone, San Diego’s chief operating officer. Faced with an $82 million deficit in his city’s 2010 budget, Goldstone negotiated pay cuts and higher benefit contributions from unions in 2009 that will save as much as $40 million annually, he said. Bankruptcy has become less attractive even as U.S. municipal borrowers coped with what the National League of Cities said was the biggest decline in general-fund revenue since 1986 last fiscal year.