What Chapter 9 bankruptcy would mean for Central FallsMay 11th, 2011 at 1:51 pm by Ted Nesi under Nesi's Notes
With Central Falls’ cash rapidly dwindling, Rhode Island’s leaders are beginning to talk seriously about the possibility that the troubled city will go to federal court and file for Chapter 9 bankruptcy – soon. What would the bankruptcy process mean for Central Falls, its residents, its workers, its retirees – and the rest of the state?
I put those questions to James Spiotto, a partner at the law firm Chapman and Cutler LLP in Chicago and a leading expert on how municipal bankruptcy works. The transcript has been lightly edited for length and clarity.
A lot of people see Chapter 9 as a way to bust municipal unions, but I’ve heard that isn’t always the case. What would bankruptcy mean for things like collective-bargaining contracts?
The municipality can decide to reject the current labor contracts. They have to ask the court to approve that, and basically they show that the existence of those contracts and their terms would prevent them from successfully being able to come up with a plan to deal with it, mainly because they lack the revenue sufficient to meet it. That was the case in Vallejo.
So it’s not automatic that the labor contracts would be rejected – it takes action by the municipality. It may lead to a mutual resolution by just discussing it; you can always settle that on a mutual basis. But the municipality may very well look at, you know, is this sustainable and affordable?
Now when you say “the municipality” here, who do you mean? It would seem like by going into bankruptcy, Central Falls would be handing over the city’s steering wheel. Who makes the big decisions about how the town functions, what bills get paid, in Chapter 9?
Generally it’s the municipality. Now in Rhode Island, you have your legislation that allows you to put a receiver in -
Right, which Central Falls has.
Right, so the question is, does the receiver stay in because they’re the one that can authorize it? The receiver may be the one who would do it. But generally, it is the municipality – the city council or the mayor – that would be taking the action. In fact, the federal judge cannot interfere with the government affairs and the revenue of the municipality. The judge is really there just to make discrete legal decisions.
For people who are receiving pensions from Central Falls – one of theirs is in terrible shape – will those be paid? Should those people be worried about those getting cut?
If their pensions are in a pension fund, then – and assume that fund is separate and distinct from the municipality, because they normally are – they would continue to be paid to the degree that there are funds in there. If they’re running short of funds, then there may not be enough funds to make a payment. And obviously the real question is, how long can you make payments and, if I’m a young employee, am I ever going to get anything out of that pension fund?
How about current payroll, bills to contractors – is that the same thing, it’s up to the manager?
It’s up to the manager, the receiver or whoever’s in place to run the city – they make the decision based on the cash they have. I mean, obviously if you don’t have funds, you can’t pay, but if you do it’s up to you to make the decision.
Unlike a Chapter 11, where you need permission to pay the workers for their pre-petition [wages], here the municipality can deal with making labor payments. And again, going forward in the bankruptcy it’s up to the municipality to decide what it believes the municipality can pay. The court isn’t there to interfere with the government affairs or revenue of the municipality.
You mentioned Vallejo out in California. Everyone’s watched the Chapter 9 process there closely, and The Times recently reported it’s been long, drawn-out and expensive. If Central Falls went in into bankruptcy, say, next week, how much time would it take to get out and what factors would decide that?
You have to come up with a plan of debt adjustment for all of your creditors – all of the creditors that existed on the date that you file. And part of the problem with Chapter 9 that people have found is any municipality of any size has all sorts of creditors – more than you realize.
You have the people who lend money for the bond debt. You’ve got the workers. You’ve got the suppliers. You’ve got insurance companies that provide insurance products to them possibly. You’ve got other relationships that provide use of property and services – all of those relationships have contractual obligations that may or may not have been filled. And to the extent that they haven’t been satisfied or fulfilled, that’s a claim, and you have to deal with it. A lot of those situations, you may like your lease of this type of equipment or you may feel that your service contract relationship here really works – but now if you haven’t paid them and you owe them money, it’s a pre-petititon claim. And you can’t discriminate against creditors of the same class.
So what I think Vallejo saw and other people have experienced in Chapter 9 is you tip over all of your creditor relationships, rather than surgically addressing those that are a problem.
We have other cities here that are in trouble – Providence, Woonsocket, Pawtucket. Do you see in other states where once one city goes down this road, more follow? Does it become more likely, or is it very much dependent on each situation?
It depends on their situation. It also may depend on people – once they see the situation and how Chapter 9 works and that it’s complicated, expensive and hard on the municipality, they may look for other ways [to deal with their financial problems]. There are other ways to find alternatives. You can refinance, you might be able to move certain services to other levels of government, there are grants and loans that the state and others can give to you – there are a number of different ways of addressing your budget problems, cutting your expenses and increasing your revenues by raising taxes.
Vallejo went [into Chapter 9] in April 2008. They hope to come out by July 2011. And the cost for bankruptcy advisers there is over $10 million. It is not a pleasurable experience. It’s difficult and hard, and it’s stressful for everyone.
That’s the reason why there’s only been 623 Chapter 9s since 1937. There have been three so far this year, six last year, 10 in 2009, four in 2008. If you look at the 623, they’re normally small special tax districts or small municipalities. There have been 252 since 1980, and the only somewhat large municipalities were Orange County in 1994, Bridgeport, Connecticut, in 1991, and Vallejo in 2008.
(photo: Chapman and Cutler LLP)