bankruptcy

Watch: After Detroit, here’s how bankruptcy went in C. Falls

July 19th, 2013 at 10:20 am by under Nesi's Notes, On the Main Site

Detroit filed for chapter 9 bankruptcy on Thursday, becoming the larger city in American history ever to declare insolvency. What happens in the Motor City will be closely followed in Rhode Island, which already had Central Falls go through its own traumatic Chapter 9 and which watched Providence Mayor Angel Taveras publicly flirt with a bankruptcy filing last year, as well.

For a refresher, then, on what Chapter 9 meant for Central Falls – and why the city’s bankruptcy lawyer Ted Orson considered it a success – it’s a good time to give an encore viewing to this Newsmakers show we taped last year with Orson and R.I. Director of Revenue Rosemary Booth Gallogly:


Chart: How Taveras closed most of Providence’s $110M deficit

January 10th, 2013 at 5:00 am by under Nesi's Notes, On the Main Site

Well, in the end Providence didn’t file for bankruptcy – an outcome that loomed as a very real possibility last winter when the city’s cash flow crisis was most acute (and a confused Judge Taft-Carter made things worse). The final audit shows Providence finished fiscal 2011-12 with an $11.4 million deficit.

The Taveras administration acknowledges the city budget still has a built-in $4 million structural deficit, though that’s way down from the $110 million shortfall his fiscal review panel originally found. So how did the mayor eliminate 96% of the structural deficit? Here’s a chart from the city with their breakdown:

(“Revenue enhancements” has to be one of my least favorite bits of political spin. I don’t expect press shops to switch to “Job-killing tax hikes,” but what about plain old “Revenue increases”?)


EDC hires Wistow as special counsel to probe 38 Studios deal

June 26th, 2012 at 3:00 pm by under Nesi's Notes

By Ted Nesi

PROVIDENCE, R.I. (WPRI) - The R.I. Economic Development Corporation has hired a special counsel, Max Wistow, to examine whether taxpayers have legal avenues to claw back some of the tens of millions of dollars they’re poised to lose after the collapse of Curt Schilling’s video game company, 38 Studios.

Read the rest of this story »


About two dozen of city’s 4,300 retirees will suspend COLAs

April 13th, 2012 at 10:36 am by under Nesi's Notes, On the Main Site

Providence Mayor Angel Taveras sent a letter March 28 asking the city’s retirees to voluntarily suspend their cost-of-living adjustments, and about two dozen have agreed so far. (Alisha Pina has more details.) The missive went out as the city continues negotiations with Local 1033, police and fire retirees.

If you want to read the documents Taveras sent, you can download them as PDFs from WPRI.com: the three-page letter, the legal release form, and the frequently asked questions. In the letter, Taveras says the city “runs the risk of running out of cash by the end of June and faces a $50 million shortfall in July.”

Another section of Taveras’s letter might be interesting to taxpayers as well as retirees:

We have a $613 million annual budget. Of that, $308.6 million is allocated to our public schools and by state law we are prohibited from cutting education funding. That leaves $305 million. We also need to make $69 million in debt payments. That leaves $235 million. Our annual required payment (ARC) to the pension system is $58.9 million. That leaves $176.6 million. Retiree medical costs amount to $38 million.

In all, we have $138.6 million to run the city. That includes payroll, public safety, road repairs, parks and recreation, contributions and support for our community centers and libraries and trash pickup, among other things. To date, we have spent approximately $92.4 million, leaving us with $46.2 million in the bank to get us to the next fiscal year. Our budget deficit is 48 percent of our remaining cash. We cannot rely solely on cutting spending to balance our budget. …

To use the language of the federal budget, only $138.6 million of the city’s $613 million budget is discretionary spending; the rest – 77% of the budget – is mandatory spending. The city will actually spend more this year on debt and retirees ($165.9 million) than it will on all non-school city services ($138.6 million).

Politically, Taveras’s challenge is made even greater because the discretionary spending category includes most of the services residents actually notice (police, parks, libraries, potholes, snow plowing). So the spending he has direct control over is also the spending people are most likely to complain about seeing cut.


RIPEC: Bankruptcy perilous for cities; pass Chafee’s bills first

April 2nd, 2012 at 6:00 am by under Nesi's Notes, On the Main Site

The General Assembly should give Rhode Island’s cities and towns as much flexibility as possible to fix their finances without declaring bankruptcy in order to help Providence and Woonsocket avoid following Central Falls into Chapter 9, according to a new study out Monday.

“Bankruptcy protection may aid municipalities who are having difficulties meeting their financial obligations by allowing greater flexibility with regard to contractual requirements and payments,” says the study by the Rhode Island Public Expenditure Council [pdf], the business-backed think tank.

“However, it often also results in greater borrowing costs for the municipality, and potentially for the state,” RIPEC says. “Furthermore, the community may become less attractive to current and potential businesses and residents … further straining the community’s fiscal capacity.”

The new study from RIPEC comes amid a growing debate over whether bankruptcy could be an unavoidable and perhaps beneficial step for some of the nation’s most fiscally distressed cities and towns. Robert Flanders, the receiver in Central Falls, has become a leading proponent of that view since putting that city into Chapter 9 last year.

(more…)


Flanders emerging as leading national proponent of Chapter 9

March 30th, 2012 at 8:59 am by under Nesi's Notes, On the Main Site

Central Falls receiver Robert Flanders is making waves in Rhode Island, all the way from Philadelphia.

Flanders flatly told a Bloomberg reporter there this week he sees no way Providence can avoid bankruptcy, a comment that appeared to leave Mayor Angel Taveras aghast – even though Flanders is advising him.

“I was surprised and I disagree,” Taveras told WPRI.com on Thursday when asked about Flanders’ remarks. “Providence is not Central Falls. I will do everything in my power to avoid that.”

“Providence,” the mayor repeated, “is not Central Falls.”

Maybe not, but Flanders is now a true believer in the power of letting cash-strapped municipalities file for bankruptcy under Chapter 9 of the federal code. The Huffington Post’s Matt Sledge reports on what Flanders told attendees at a Bond Buyer conference in Pennsylvania’s capital:

From the comments of Flanders and others at the municipal bonds conference, it seems like the industry is in agreement about one thing going forward: someone is going to have to suffer, and it shouldn’t be bondholders. And the draconian measures needed to stave off financial disaster will often require an unelected official – be it a receiver in Rhode Island or an emergency manager in Michigan – to assume near-dictatorial powers.

Bankruptcy, Flanders said, should no longer be a dirty word. Sometimes it’s the only way to extract concessions from public employees unions and retirees, who he said weren’t very happy when he first proposed slashing pensions by 50 percent. …

It was only bankruptcy’s provisions that let Flanders, as city receiver, actually go through with those cuts, he noted. “We could blow up any contract we liked.”

Public employees’ concerns should be balanced, he argued, against the investors whose money allows cities to operate.

Read the rest here. All this comes as Taveras continues to struggle in Providence, Woonsocket prepares to slap a 13% midyear tax hike on its residents, and Governor Chafee is beating the drum for his far-reaching package of municipal-relief legislation. Chafee will discuss his proposal on “Newsmakers” this weekend.

HuffPo isn’t the only left-leaning publication covering Providence’s financial troubles, either. The Nation’s Erin Schikowski, who attended Taveras’s retiree town hall earlier this month, filed a story giving an overview of the situation on TheNation.com this week, too.

(photo: AP)


Q&A: Penn Law’s Skeel on RI pensions, bankruptcy and bonds

March 2nd, 2012 at 6:00 am by under Nesi's Notes, On the Main Site

On Saturday morning, Providence Mayor Angel Taveras will convene a meeting of the city’s retirees to ask them to accept reductions in their pension benefits to help the capital avoid filing for bankruptcy, as nearby Central Falls did last August. What happens if they don’t come to an agreement?

David Skeel is a professor at the University of Pennsylvania Law School in Philadelphia and a nationally known expert on bankruptcy and Chapter 9. We spoke on Thursday about what bankruptcy would mean for Providence’s pension system, how Central Falls has changed the legal landscape, and why he doesn’t buy the case for Rhode Island’s bondholders-first law. The transcript has been lightly edited for length and clarity.

I was fascinated by the argument in your working paper that government employees’ and retirees’ property rights cover the pension fund but not the pension promises. Could you explain that?

The question is if a city or a state makes a pension promise, but does not fund the promises – which has been true in many states in recent years – what exactly is protected in the event of a default or of bankruptcy? A lot of people assume that what’s protected is the full promise, even if there’s no funding behind it.

Although this is certainly not free from doubt – this is unchartered territory in many respects – my view is that there’s a good argument that what’s protected is the amount of money that’s been set aside. Pension obligations are a form of what we refer to in the law as a property right, and other kinds of property rights are protected up to the value of the property that’s set aside for them. So if somebody has collateral for a transaction, we treat that promise as sacrosanct up to the value of the collateral.

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WPRI Poll: State should keep Providence out of bankruptcy

February 28th, 2012 at 5:45 pm by under Nesi's Notes, On the Main Site

By Tim White and Ted Nesi

PROVIDENCE, R.I. (WPRI) – More than two-thirds of Rhode Islanders want the state to help Providence avoid going bankrupt, according to an exclusive WPRI 12 poll released Tuesday evening.

The new survey of 511 registered voters finds 71% think the state should do what’s necessary to prevent the capital city from filing for bankruptcy, while 19% think the capital should be allowed to reduce its debts by filing as Central Falls has, with 10% unsure.

“I was kind of surprised 71% said ‘save the city’ – that’s overwhelming,” WPRI 12 political analyst Joe Fleming said. “Obviously, the residents of Rhode Island want to avoid the capital city going into bankruptcy. That would really put a black eye on Rhode Island.”

Read the rest of this story »


Mayor cites ‘progress’ before third meeting with Brown U. prez

February 28th, 2012 at 10:32 am by under Nesi's Notes, On the Main Site

By Ted Nesi

PROVIDENCE, R.I. (WPRI) – Providence Mayor Angel Taveras says he’s “making good progress” in negotiations with Brown University over how much the Ivy League school should increase its contribution to the city budget.

Taveras and Brown President Ruth Simmons have met face-to-face twice in the last two weeks and spoke by telephone on Monday, the mayor told WPRI.com. “We’re planning to meet again soon,” he said. “She’s personally involved.”

Taveras met earlier this month with the CEOs of Providence’s large hospitals to plead the city’s case with them. “We’re pursuing that, as well,” he said. “Those conversations are ongoing.”

The mayor has asked Providence’s largest tax-exempt schools and hospitals to contribute an additional $7.1 million to the city budget as he tries to keep the state capital out of bankruptcy. An exclusive new WPRI 12 poll set for release Tuesday at 6 p.m. will show whether Rhode Islanders think the state should keep the city out of Chapter 9.

Taveras will meet Saturday morning with city retirees to ask them to accept voluntary reductions in their pension benefits. “You have to have structural change,” the mayor said Tuesday. “You cannot simply rely on more revenue to solve this problem.”

• Related: Moodys: Cities must balance tax-exempts’ cash, contributions (Feb. 15)

(photo: Ted Nesi/WPRI)


Municipal bankruptcy bustin’ out all over, California edition

February 24th, 2012 at 1:13 pm by under Nesi's Notes

If it’s any consultation to Providence, the city isn’t alone in weighing a Chapter 9 filing, Bloomberg reports:

The City Council of Stockton, California, will be asked to vote next week to default on bonds and take the first steps toward bankruptcy, according to a person familiar with the council’s agenda.

City Manager Bob Deis has told council members that he intends to put an item on their agenda for a Feb. 28 meeting that would ask them to approve mediation with creditors as the first step required under a new state law before the city can seek bankruptcy ….

Deis also will ask the council to agree to stop making payments on municipal bonds beginning March 1, to suspend cash payouts to employees for unused vacation and sick leave, and to begin an investigation into the causes of the city’s fiscal crisis ….

Stockton, an agricultural center of about 292,000, is fighting to avert California’s biggest bankruptcy since Vallejo in 2008. The city has shrunk its payroll, including a quarter of the roughly 425-member police force. Twice since 2010 it has declared a state of fiscal emergency to force cuts on public employees.

• Related: Prof: Providence retirees may face 73% haircut in bankruptcy (Feb. 22)


Prof: Providence retirees may face 73% haircut in bankruptcy

February 22nd, 2012 at 6:00 am by under Nesi's Notes, On the Main Site

Providence Mayor Angel Taveras and city retirees don’t agree on much, but they’d probably both acknowledge that Providence’s pension system has a sizable long-term shortfall.

The math is pretty simple. Providence has promised its workers and retirees $1.32 billion in pension benefits, but it’s saved only $362 million to pay them. Thus, the city pension fund was short $958 million as of June 30 (based on market value).

As is often pointed out, there’s no immediate crisis there. The city must pay that $1.32 billion over decades – it’s not about to receive a bill for the other $958 million, an amount that’s far more than this year’s entire $614 million city budget.

But a more immediate crisis – a bankruptcy filing by the city – could force the question sooner. And if that happens, the retirees may discover their unfunded pension promises are worthless IOUs.

(more…)


Mayor hopeful Providence can avoid bankruptcy; in court soon

February 6th, 2012 at 1:26 pm by under Nesi's Notes, On the Main Site

By Ted Nesi

PROVIDENCE, R.I. (WPRI) – A markedly more upbeat Providence Mayor Angel Taveras expressed optimism on Monday that Rhode Island’s capital city can avoid bankruptcy through the collective efforts of city and state officials.

Taveras pushed back forcefully against those who’ve urged him to simply file for Chapter 9 bankruptcy. His comments came after a closed-door briefing where he and other city officials briefed lawmakers, including Senate President M. Teresa Paiva Weed, on the looming crisis that led him to warn last week the capital is on “the brink of bankruptcy.”

Providence faces a roughly $22.5 million deficit in its budget for this fiscal year, which ends June 30, and a projected $30 million deficit in its budget for 2012-13, according to Michael D’Amico, the city’s director of administration.

City lawyers will meet with a high-court official on Wednesday as a first step in its effort to overturn last week’s decision blocking it from moving retirees to Medicare. Taveras also hinted that he could have “positive news” to release soon regarding a deal with Brown and the other tax-exempts.

Read the rest of this story »

An earlier version of this story reported, based on official comments, that the meeting at the Rhode Island Supreme Court would occur Monday. A court spokesman said it is scheduled for Wednesday.

(photo: Ted Nesi/WPRI)


Paiva Weed open to local pensions fix – and $2M CF bailout

December 27th, 2011 at 12:34 pm by under Nesi's Notes, On the Main Site

The position taken by Senate President M. Teresa Paiva Weed will play a key part in determining what role the General Assembly will play in dealing with Rhode Island’s 36 locally run municipal pension plans next year. Jim Baron of The Pawtucket Times and The Woonsocket Call sat down with the Newport Democrat and got her take.

Paiva Weed told Baron she wants “sustainable, long-term structural changes, not simple quick fixes” for the local plans. Also interesting – she expressed some support for the idea of the state appropriating $2 million to boost pension benefits in Central Falls, which have been cut up to 55% since the city’s August bankruptcy filing.

Read the interview here.


Bankruptcy lawyer: National unions may block CF pension deal

October 24th, 2011 at 4:45 pm by under Nesi's Notes

The Bond Buyer ran a piece today on Rhode Island’s pension debate, tying it to the discussions going on in other states like New Jersey. Not much new in there, but it’s a good overview.

For local pension-watchers, the most interesting section was this discussion of the situation in Central Falls, where receiver Robert Flanders continues to negotiate with the city’s unions over reductions in their pension benefits:

“Credit Central Falls; they’re dealing with the issue,” [said Jonathan Henes, a New York restructuring partner at law firm Kirkland & Ellis LLP.] “When I look at the whole world — cities and states, the federal government, and even Europe — there’s a lot of talk and people then kick the can down the road.

“In Central Falls, they took the bull by the horns and said ‘We’re going to fix this city.’ At the end of the day, they’re dealing with the issue. The solutions may be painful, but they’re going about it aggressively.”

Henes expects compromise in Rhode Island.

“There’s a decent chance that this will be resolved through a consensual deal,” he said. “Here’s the issue, if I take a step back: If it were just up to the local unions, there would be a deal, but the national unions will be stepping up because they don’t want to see a precedent set.”


Pennsylvania reruns RI vs. Central Falls after Chapter 9 filing

October 20th, 2011 at 4:01 pm by under Nesi's Notes

Does this remind anyone else of a dramatic sequence of events in Rhode Island last year? Reuters reports:

Pennsylvania Governor Tom Corbett signed legislation on Thursday that allows for the takeover of the state’s capital city of Harrisburg, setting up a legal confrontation between the state and the city.

The bill paves the way for the governor to declare a state of fiscal emergency that leads to a recovery plan for Harrisburg, which filed for bankruptcy last week. …

The Harrisburg City Council voted 4-3 on October 11 to file for a Chapter 9 municipal bankruptcy as a way of resolving a massive debt crisis brought on by the funding of an incinerator that hasn’t generated enough cash.

The action immediately generated conflict between the City Council and the mayor, Linda Thompson, the state legislature, and the governor, who dispute the legality of the Council’s action in filing for bankruptcy.

In some ways, the situation in Pennsylvania is even more precarious because the municipality filing for bankruptcy is the state capital – imagine if Providence was in Chapter 9.


What do Friendly’s and RI have in common? A pension mess

October 17th, 2011 at 1:40 pm by under Nesi's Notes

Happy Pension Eve, readers. As we await the Raimondo-Chafee bill to finally be made public tomorrow, Rhode Islanders can take some consolation in the fact that their government isn’t the only local institution with pension problems:

The pensions of nearly 6,000 Friendly’s workers and retirees are at risk under a plan for the restaurant chain’s owner to retain control of the company through bankruptcy proceedings, according to the U.S. government agency that insures corporate pensions.

The Pension Benefit Guaranty Corp. on Thursday accused Friendly Ice Cream Corp. of plotting to dump its employee pension plan through a proposed deal to sell its assets to private-equity firm Sun Capital Partners, the buyout shop that took the restaurant chain private in 2007. …

A termination of the Friendly’s plan would leave the PBGC on the hook for those workers’ benefits. The agency estimates the plan has a $50 million shortfall. The PBGC is currently running a $23 billion deficit. …

The PBGC said it would pay pension benefits to Friendly’s employees if the plan is terminated, though possibly at reduced rates.

Let’s all hope this story has a Happy Ending. And no, the PBGC doesn’t insure government pension plans like Rhode Island’s and our municipalities’, so that’s not an option for Chafee and Raimondo.

(via The Wall Street Journal)


Friendly’s ice cream files for Chapter 11 bankruptcy

October 5th, 2011 at 10:34 am by under Nesi's Notes

The Wall Street Journal had it right last week. Friendly’s Ice Cream Corp. filed for Chapter 11 bankruptcy protection on Wednesday, and announced plans to close locations in Warwick, Wakefield, Attleboro and Taunton, among other places.

Friendly’s employed 162 workers at five locations in Rhode Island as of March, according to R.I. Economic Development Corporation data, including 37 in Wakefield and 30 in Warwick. It shuttered the Attleboro restaurant on Pleasant Street (Route 123) near Norton but kept open its other location on Route 1.

Ironically, considering it was pushed into Chapter 11 by the Great Recession, Bloomberg notes Friendly’s first opened “at the height of the Great Depression.”

Meanwhile, the list of familiar brick-and-mortar retailers who’ve fallen victim to the Great Recession continues to grow: Circuit City, Borders, Linens and Things, Blockbuster, Bugaboo Creek, Tweeter, Sbarro.


A Vallejo councilwoman warns Central Falls about Chapter 9

August 15th, 2011 at 7:00 am by under Nesi's Notes

Stephanie Gomes is a member of the City Council in Vallejo, Calif., which finally exited Chapter 9 last week more than three years after it first declared bankruptcy. With Central Falls looking to Vallejo for guidance in how the process works, Gomes wrote in to share her thoughts on what happened there:

The thing people don’t understand is how our employee unions dragged us through legal challenges that ultimately cost us both years and millions of dollars – we’ve spent approximately $11 million in legal fees.

Our unions challenged our solvency, whether we were hiding money, demanded we pay them from restricted funds, and ultimately fought us on whether we could tear up our CBAs [collective bargaining agreements]. We prevailed on these challenges, but it was costly and completely unnecessary.

We proved legally we could have restructured our employee contracts (94% of our general fund), but failed to do so in a meaningful way because of a lack of political will. We even gave raises to employees in bankruptcy! (I was in a minority against an employee-union-funded/supported majority.) Now the majority is asking for a sales tax increase to make up for what they failed to do in bankruptcy.

I recently gave a talk to a local taxpayers association on an “inside look” at our bankruptcy that you might be interested in. I have my speech transcript and a link to a video of the speech, with Q&As afterwards where I had our former city manager come up and enlighten people on a few outstanding questions. It’s at StephanieGomes.com.

I understand Rhode Island has different laws than California, but I certainly hope you all don’t get mired in legal battles or political games.

(photo: Associated Press/Eric Risberg)

 


Could RI’s pay-bondholders-first law be unconstitutional?

August 12th, 2011 at 9:00 am by under Nesi's Notes

The debate continues over whether Rhode Island is “a bondholder’s dream,” as The Wall Street Journal argued last week, or just a haven for slap-dash lawmaking.

“A new Rhode Island law that guarantees municipal bondholders will be paid back even if the cities and towns in which they invest go bankrupt could spur a nationwide trend – if courts allow it to stand,” Reuters’ Nick Brown writes in a new analysis piece.

The argument over whether the new law will pass muster in the courts is an interesting one since it could have national implications. But it may take a long time before the question is settled, Brown writes:

Central Falls’ leaders will look to apply the new law as it tries to restructure the city’s debt.

Legal experts said nothing in federal bankruptcy law appears to stop them from doing so. …

But the law is the first to apply retroactively to agreements with vendors owed money under pre-existing contracts with the city, said Karen Grande, Rhode Island’s municipal finance counsel.

[David Skeel, a bankruptcy and corporate law professor at the University of Pennsylvania Law School,] said retroactively protecting bondholders at the expense of other creditors could violate the Contracts Clause of the U.S. Constitution. He said the matter could wind up being appealed, possibly to the U.S. Supreme Court.

If the law gets challenged in federal court, it’s going to be up to the state to send lawyers to defend it. That possibility is already on the mind of Attorney General Peter Kilmartin, who mentioned it Thursday while discussing Central Falls during a taping of WPRI 12′s “Newsmakers.”

That also raises another question – will investors take comfort in the new law if its constitutionality is in doubt? Officials have said the point of passing the legislation was to reassure the bond market so that other local cities and towns, as well as the state, could continue borrowing money. But it may be a long time before doubts about the law are put to rest.

This issue of making laws retroactive has been a recurring one during the Central Falls crisis. The act that was hurriedly passed after the city’s leaders filed for judicial receivership last year was also written so it would apply to the days before they went to court. State leaders have been largely reactive, not proactive, in Central Falls.

The full Reuters article is here. Thanks to a savvy reader for sending it my way.

(photo: CoinCircuit.com)


R.I.’s legal bills top $1 million so far in bankrupt Central Falls

August 10th, 2011 at 1:05 pm by under Nesi's Notes

Central Falls filed for bankruptcy just last week, but the legal costs of the city’s 15-month-old financial crisis are mounting fast, according to a new story I just posted on WPRI.com:

A parade of lawyers has charged bankrupt Central Falls more than $1.2 million since its leaders declared insolvency – and state taxpayers have foot most of the bill, according to records obtained by WPRI.com.

As of Monday, the state had paid $1.07 million in legal fees to five lawyers and law firms for their work in Central Falls, while the city government had paid $158,215 to two more, according to the governor’s office. The city filed for receivership in May 2010 and declared bankruptcy last week.

The biggest payments so far have gone to the Providence law firm Orson and Brusini. Theodore Orson, a partner there, is the city’s lead bankruptcy attorney. His firm has charged the state $365,951 as of this week.

Close behind is Edwards Angell Palmer & Dodge, a large firm with an office in Providence. Karen Grande, an expert on municipal law at the firm, is assisting Orson with Central Falls’ case. Edwards Angell has charged the state $350,060.

Patrick Rogers, Gov. Lincoln Chafee’s chief of staff, was a partner at Edwards Angell before joining the administration in January. Chafee’s father, the late Sen. John Chafee, was also a lawyer for the firm, which hosted fundraisers for the future governor during his campaign.

Read the rest of the article to find out how much the three receivers have made and why Robert Flanders is nervous about another legal cost the city could be facing.


The endgame for Central Falls’ bankruptcy case

August 5th, 2011 at 10:09 am by under Nesi's Notes

BofA Merrill Lynch Global Research sent me two recent reports its analysts put together on the drawn-out Chapter 9 bankruptcy of Vallejo, Calif., which Tim White wrote about yesterday here on WPRI.com. “Vallejo does not make municipal bankruptcy look appealing,” BofA Merrill’s John Hallacy writes.

A judge approved Vallejo’s second attempt at a bankruptcy exit plan just last week, “following a very significant degree of ongoing negotiations and a degree of litigation activity,” according to Hallacy. Before that, though, Vallejo’s creditors had to vote to approve the plan:

For the Plan to be approved by the court, only one Class of impaired claims needs to approve the Plan. There are seven Classes that are eligible to vote on the Plan …. Under the requirements pertaining to each individual Class, for an affirmative vote to be valid, either one half in numbers of the claims in the Class must approve, or two-thirds of the amounts associated with the claims in the Class must vote in the affirmative.

In the event of outright rejection, the court may pursue approval of the plan through a “cram-down” that is provided for under the Code. Such a cram-down would need to be, at a minimum, fair and equitable and may not discriminate “unfairly.”

That actually seems like it could be a relatively low bar to get a bankruptcy exit plan approved – half the people or two-thirds of the claims from just one out of seven classes of creditors? It raises the question, too, of how many classes of creditors there will be in Central Falls. Off the top of my head, the groups I can think of are the retirees, the current workers, the unsecured creditors and the (apparently protected) bondholders. I don’t know enough about bankruptcy law to say how they would be broken up into classes, though.

Here’s another interesting section of the BofA report (emphasis mine):

Municipal market participants have been correct in their assumptions that [bond] haircuts would be unavoidable in this case. On the other hand, renegotiated collective bargaining agreements (CBAs) and the existing obligations to the California Public Employees Retirement System (CalPERS) for pension payments will continue to be honored. The [exit] Plan maintains that the City was able to save some $34 million through June 30, 2010, by renegotiating existing CBAs. Purportedly, the main rationale for filing [for bankruptcy in Vallejo] was to start anew in these two functional areas. In fairness, some of the CBAs have been changed; but the CalPERS obligations are essentially the same as what had existed prior to the filing.

That makes Vallejo a very different situation from Central Falls. There, bondholders took a haircut; here, the General Assembly has moved to protect them from losses. More importantly, if Central Falls’ $80 million in pension and retiree health obligations remain “essentially the same” when its bankruptcy case is done, it’s hard to see what the point was – those are the liabilities that officials say are weighing down the city most.

Receiver Robert Flanders says he wants Central Falls out of bankruptcy within six months, and plans to file a restructuring plan with the judge by the end of this month. But when you look at Vallejo, it’s easy to see how the case could drag on far longer.

Speaking of Flanders, he will be the guest on this weekend’s edition of WPRI 12′s “Newsmakers.” The show airs at 10 a.m. Sunday on Fox Providence.

(photo: Associated Press/Eric Risberg)


Vallejo city manager offers bankruptcy warnings to C. Falls

August 4th, 2011 at 5:37 pm by under Nesi's Notes

Vallejo, Vallejo, Vallejo.

The Northern California city has been a hot topic – and a cautionary tale – here in Rhode Island lately as one of the few municipalities to go bankrupt à la Central Falls.

“We don’t want to repeat the Vallejo experience, that’s for sure,” Central Falls receiver Robert Flanders told me during Monday’s news conference announcing its bankruptcy filing. U.S. Bankruptcy Judge Frank Bailey, who is presiding over Central Falls’ case, said in court he wants this case to move much more swiftly than Vallejo’s did.

Coincidentally, Central Falls’ descent into Chapter 9 is coinciding with Vallejo’s emergence from it; just last week, a judge gave preliminary approval to the city’s plan for exiting bankruptcy – nearly three years, and $11 million in legal fees, after it first filed for protection from its creditors.

So what can Central Falls learn from Vallejo? Plenty, as my colleague Tim White found out when he called the California community’s town manager to ask:

Phil Batchelor, Vallejo’s city manager who was brought in last year to help the community navigate out of bankruptcy, said filing for Chapter 9 should be avoided “at all costs.”

“Bankruptcy causes a cloud of gloom to be over the whole city,” Batchelor told WPRI.com. “Not only the city government itself but the citizens that live here.”

In the end Vallejo spent $11 million on legal fees over its three years in court, Batchelor said.

“People don’t realize you we will be paying for legal fees of the unions and any other claimants that take issue,” Batchelor said. An attorney for Central Falls’ retirees made that request in court this week.

Read Tim’s full story here – there’s much more.

One other interesting wrinkle is the question of how much weight, if any, legal decisions made in the Vallejo case will carry here. Central Falls’ attorney cited the Vallejo precedents repeatedly in his arguments, but in court Wednesday two attorneys for the city’s unions disputed their relevance, with Diane Finkle, a lawyer for the police union, citing the “unique and specific circumstances” of Rhode Island law.

(photo: City of Vallejo)


Flanders says C. Falls cash woes forced him to cut talks short

August 4th, 2011 at 2:22 pm by under Nesi's Notes

Did receiver Robert Flanders wait too long to open concession talks with Central Falls’ unions and retirees?

That accusation was leveled in court Wednesday by Matthew McGowan, an attorney for the city’s retired firefighters. He called Flanders’ plan to slash his clients’ pensions “an eleventh-hour proposal” that they did not have enough time to review.

Central Falls’ attorney acknowledged separately how little time passed from the start of talks between the two sides and Monday’s bankruptcy filing.

Flanders was appointed in February, but he didn’t open negotiations with Council 94 until May 15; with the police and fire unions until July 1; and with retirees until July 5, less than a month before the bankruptcy filing, according to court documents filed this week by the attorney, Theodore Orson.

Flanders defended his handling of the situation on Wednesday, saying he waited three months to start negotiations because it took that long to figure out how much Central Falls needed in concessions to stave off bankruptcy.

“First we had to come up with an idea of what we were asking for,” he told WPRI.com. “It took a while to come up with that.”

But by the time talks began in earnest, Central Falls was already facing a severe cash crunch that was projected to leave the city unable to pay its bills this month, Flanders said. Without concessions or a bailout from the state, he said he was forced to file for Chapter 9 this week.

In effect, he said, the receiver’s office got “squeezed” between the time it took to get a handle on the problem once Flanders took office and the time when Central Falls’ cash was set to run short. Flanders’ predecessor as receiver, Mark Pfeiffer, was in charge of the city from July 2010 through last February.

McGowan took a different view in court. He told the judge it was incorrect to say there were “negotiations” between the receiver and the retirees, because they were presented with a proposal and told to take it or leave it, then weren’t given enough time to vet it before the bankruptcy filing.

McGowan suggested Flanders’ failure to formally negotiate with the retirees before filing for Chapter 9 could be a reason for the judge to dismiss the case and throw it out of court.

(photo: Associated Press/Stew Milne)


Will Central Falls make city bankruptcies ‘socially acceptable’?

August 2nd, 2011 at 3:56 pm by under Nesi's Notes

The Bond Buyer – last seen around here when Frank Caprio used it to make a splash on 38 Studios – has a front-page article about Central Falls’ bankruptcy filing aimed at its elite readership. The headline: “Central Falls Aims to Protect GOs; Chap. 9 Will Give Investors 1st Lien.” (“GOs” stands for general-obligation bonds.)

As others have noted, Rhode Island’s new law making bondholders the top priority for repayment in a municipal bankruptcy means it’s unlikely the investors who own Central Falls’ $20.8 million in debt will lose a dime. The San Jose School District made a similar move in the 1980s, according to Bond Buyer.

Chapter 9 expert James Spiotto – the Chicago attorney who did a Q&A here last spring – spoke with the newspaper, and said the Central Falls case could provide a counterexample to Vallejo, Calif., which has become the poster child for a painful, drawn-out municipal bankruptcy.

“The interesting issue is, could this become a trend which makes Chapter 9 more socially acceptable?” Spiotto told Bond Buyer. “It really should be the last resort even if bondholders are well taken care of and protected. This could be a new trend, but the proof is in the pudding.”


All eyes on Central Falls for Monday decision on bankruptcy

July 29th, 2011 at 3:21 pm by under Nesi's Notes

What is Judge Flanders going to tell us Monday morning?

That’s the question everyone is asking this afternoon after most of Central Falls’ retirees failed to agree to the reductions in their pensions proposed by Flanders, the city’s state-appointed receiver.

Flanders is now “deciding upon the best possible course of action to put the City of Central Falls on solid financial footing,” according to a statement issued earlier today. “An announcement is expected Monday morning.”

That announcement will presumably take the form of a press conference in the cash-strapped city. The Chafee administration has put in place a news blackout until then, and spokesman Christian Vareika declined to break it when I called him. “We expect speculation,” he said.

You don’t need a crystal ball to know most of that speculation revolves around whether Flanders plans to pull the trigger and have Central Falls file for Chapter 9 bankruptcy early Monday. Governor Chafee briefed lawmakers about the situation on Thursday, the Projo’s Kathy Gregg reports.

Bankruptcy would help by giving the city more leeway in renegotiating contracts, but a Chapter 9 filing could also do further damage to the state’s image, Chafee said Tuesday during a taping of WPRI 12′s “Newsmakers.”

“So we’re trying to balance those two interests – what we can achieve in the laws of bankruptcy, with the perception of who is next and what bad things might flow from a bankruptcy in Central Falls,” the governor said. “We’re trying to balance those and avoid bankruptcy if we can.”

“It’s a high priority for the administration,” he added.

After the meeting with retirees earlier this month, Flanders emphasized that bankruptcy would be all but inevitable if he did not get most of them to agree to pension concessions. “If a substantial number say no, then bankruptcy becomes a much more likely option,” he said. “Then it’ll be up to the bankruptcy judge.”

Asked if there was another way to avoid Chapter 9 without the pension concessions, Flanders replied: “I don’t know of one right now.”

Not that Flanders has ever minced words about the situation in Central Falls.

Last month, he told me bankruptcy was “more likely than not” and that a decision would be made “certainly no later than the end of August … and perhaps much sooner.” In May, he said “the bankruptcy option looms much larger” unless state lawmakers provided a bailout (which they didn’t) or workers and retirees agreed to major concessions.

That doesn’t mean a bankruptcy filing is a certainty come Monday. Deadlines have a way of clarifying things in people’s minds, and sometimes a deal gets reached that wouldn’t have been possibly until the eleventh hour. And Flanders could decide Chapter 9 still isn’t the best solution there. But a filing does seem more likely than not.

If Central Falls does file for bankruptcy – which happens in federal court, not state court – the judge for the case will be appointed by Chief Judge Sandra Lynch of the 1st U.S. Circuit Court of Appeals in Boston, according to Flanders’ office. It won’t necessarily be Judge Arthur Votolato, the U.S. Bankruptcy Court judge for the District of Rhode Island.

For more on what would happen next, read my May Q&A with Chapter 9 attorney James Spiotto. “It is not a pleasurable experience,” he said. “It’s difficult and hard, and it’s stressful for everyone.” It’s also expensive – Vallejo, Calif., has spent more than $10 million since filing for Chapter 9 in 2008 and is still trying to get out.

More coverage of the Central Falls crisis on Nesi’s Notes:


NYT: C. Falls mess ‘could push the state itself to the brink’

July 18th, 2011 at 7:00 am by under Nesi's Notes

The New York Times ran a big story last week about Central Falls’ financial woes, and what it all means for Rhode Island. I finally got around to reading it and thought I’d highlight a few points.

The scariest paragraph by far was this one (emphasis mine):

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.

“Push the state itself to the brink”? Yikes. Granted, the sourcing is pretty vague – “some analysts” – but the fact that The Times is seriously speculating about Rhode Island pulling a Greece is pretty astonishing.

Some more highlights:

• It’s probably not good that the first sentence of a front-section article in the nation’s paper of record said a place in Rhode Island “appears to be headed for a rare municipal bankruptcy filing, and state officials are rushing to keep its woes from overwhelming the struggling state.” That’ll catch an investor’s eye.

• If Central Falls’ John Hancock pension plan does indeed run out of money in October as predicted, it will only be the second time an American city has ever completely drained a pension fund. The first was Prichard, Ala., a troubling case which we discussed in comments recently.

• A Statehouse watcher had pointed this out to me, but I hadn’t gotten around to writing about it yet – a bill passed by the General Assembly at the very end of the session not only put bondholders’ claims first, it also “makes local officials personally liable for any losses they cause by failing to comply with the new requirements” (emphasis mine). So mayors and town managers could see their own bank accounts drained if they get blamed for their municipality’s disintegration. Ouch.

Make no mistake, Central Falls is under a national microscope, and the way state and local leaders handle its problems could have far-reaching reverberations.

Related: What Chapter 9 bankruptcy would mean for Central Falls (May 11)


Flanders: Central Falls bankruptcy now ‘more likely than not’

June 22nd, 2011 at 7:00 am by under Nesi's Notes

The House Finance Committee’s refusal to pony up money to cover Central Falls’ budget deficit means the cash-strapped city may file for Chapter 9 bankruptcy before the end of the summer, its state-appointed receiver says.

“I think it’s more likely than not,” Robert Flanders told WPRI.com late Tuesday. “I don’t want to handicap it beyond that, because I want to give everybody a chance to step up here.”

Flanders is trying to secure large concessions from the city’s unions to avoid a Chapter 9 filing in federal court. He said the city is “rapidly running out of cash” and the denial of a state bailout will require the talks to move even faster.

“There are going to be very big ‘asks,’ so it’s hard to be optimistic about it,” he said. “On the other hand, bankruptcy could be even worse, and as I’ve said before, a haircut still looks better than a beheading.”

The finance committee approved a budget proposal last Friday that does not include $4.9 million Governor Chafee wanted to spend to buy more time for Central Falls to stabilize its finances. The city filed for receivership more than a year ago.

“I’m not surprised at all,” Flanders said. “The suggestion [from lawmakers] was, ‘We’ve got other distressed communities; why should we help Central Falls over the others? We’re already funding the [city's] schools to the tune of $42 million a year. Enough is enough.’ ”

House spokesman Larry Berman was not immediately available to comment on the finance committee’s decision.

Last week, Moody’s Investors Service downgraded Central Falls’ bond rating again and gave it a negative outlook, saying the city could default on its obligations early in the new fiscal year that starts July 1. Flanders acknowledged that’s a possibility.

A decision on whether to file for bankruptcy is likely to come “over the next several weeks – certainly no later than the end of August … and perhaps much sooner depending on our cash flow, how well we collect our taxes, how well we manage our other obligations,” he said.

Related: What filing for Chapter 9 bankruptcy would mean for Central Falls


Woonsocket could be forced into bankruptcy, Fontaine warns

June 10th, 2011 at 11:05 am by under Nesi's Notes

Woonsocket Mayor Leo Fontaine is warning his city is teetering on the edge of bankruptcy after years of budget woes and this week’s massive mill fire.

Asked whether Chapter 9 bankruptcy was a possibility for Rhode Island’s sixth-largest city, Fontaine replied: “Quite honestly, we are on the verge of going either way. It’s a really tenuous situation.”

Fontaine, a Republican former city councilman who was elected mayor in 2009, made the comments Friday during a taping of WPRI 12′s “Newsmakers.”

In March, Woonsocket borrowed $11.5 million in the bond market to cover annual budget shortfalls run up in recent years. The city finished its 2009-10 fiscal year $12.3 million in the red. Woonsocket’s annual budget is $116 million this fiscal year, which ends June 30.

Moody’s Investors Service downgraded Woonsocket’s bond rating from “Baa2″ to “Ba1″ – junk-bond status – in April 2010. The following month, Fitch Ratings slashed the city’s rating four notches, from “A” to “BBB-,” and put it on a negative watch because of “the rapid and significant deterioration” in its finances.

Fitch and Moody’s both left Woonsocket’s rating unchanged last February, but Fitch raised its rating outlook to stable, citing the city’s “progress towards future fiscal stability through prudent management actions.”

Fontaine said he was forced to scrap his initial plan to refinance the city’s debt after the credit rating downgrade. His administration has since negotiated concessions with a number of unions and crafted a five-year plan that he hopes will stabilize the city’s finances.

“Any little thing could throw us off of that, though, and it is very tenuous at best, and when you look at the condition of what’s happening in the state, I get very concerned,” he said. Ending this fiscal year with another deficit would be extremely damaging, he added.

The mayor said he has been working closely with the Carcieri and Chafee administrations in figuring out a way forward for Woonsocket. “Obviously, they don’t want to see another community go into receivership” the way Central Falls did last year, he said.

The fire that destroyed the landmark Alice Mill this week was a setback for the city’s economic development efforts because the facility was in the process of being redeveloped and was set to bring more jobs to the city, Fontaine said, though he added that he remains optimistic about the site’s potential.

The mayor said he has asked Gov. Lincoln Chafee for financial assistance to help cover the cost of overtime for fire, police, water, highway and other workers who responded to the fire. Fontaine said Chafee told him he will “look into” whether that’s possible.

The full episode of “Newsmakers” will be posted online later today and airs Sundays at 10 a.m. on Fox Providence.

WPRI reporter Tim White contributed to this report.


What Chapter 9 bankruptcy would mean for Central Falls

May 11th, 2011 at 1:51 pm by 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?

(more…)


Wall Street Journal latest to smack Central Falls

January 31st, 2011 at 7:00 am by under General Talk

The national press has taken another whack at our local piñata, Central Falls, with Wall Street Journal editorialist Allysia Finley doing the honors this time in an op-ed piece headlined ” ‘The City With a Bright Future’—$80 Million in the Hole.”

Unsurprisingly considering her employer, Finley pins the blame for Central Falls’ myriad problems squarely on its municipal employees and their unions. To her credit, Finley actually traveled to the city to speak with people there before putting pen to paper. Here’s how she opens:

Welcome to Central Falls. Motto: “The City with a Bright Future.” Population: 19,000. Median household income: $22,000. Elevation: more than $80 million under water.

Visitors to this tiny town on the banks of the Blackstone River would never guess that it was once a prospering manufacturing hub. Thousands of Irish and Scottish immigrants flocked here in the 19th century, drawn by opportunities to work in the mills and mines. But since Rhode Island’s public employees received the right to collectively bargain in the 1960s, government unions have driven Central Falls into the ground.

(Did Irish and Scottish immigrants really flock to Central Falls? I always thought it was more of a destination for French-Canadians.)

Finley goes on to lay out the now familiar Central Falls litany: its nearly insolvent John Hancock pension plan; its 1991 fiscal crisis; its moribund economy; and its dysfunctional high school. The details haven’t changed, but they’re still depressing.

I’d add two points. First, Finley actually understates the size of Central Falls’ financial hole – she highlights that $80 million estimate of the city’s unfunded liability for retiree benefits, but leaves out the additional $31 million in debt payments it owes between now and 2028, according to receiver Mark Pfeiffer.

That puts Central Falls’ long-term liabilities at well over $100 million – this in a city with an annual budget of only $17.8 million last fiscal year. (As always with those types of figures, keep in mind that the city won’t need to come up with the full amount all at once – payments are spread out over a couple decades.)

Finley goes on to write: “Too bad Central Falls was denied [permission to file for Chapter 9] bankruptcy, which would allow it to break its collective-bargaining agreements and force public employees to accept significant cuts.”

I’m hearing this idea a lot lately – that filing for Chapter 9 would be a fairly clean way for cities and towns, and perhaps even entire states, to jettison their deals with their workers.

But Bloomberg columnist Joe Mysak – who’s been covering municipal finance since 1981, and thus knows a lot more about the topic than either Finley or yours truly – throws cold water on that idea:

There’s nothing easy, or convenient, or cheap, or quick, or even predictable about Chapter 9. Those who talk about municipal bankruptcy as if it is any of those things, and the blogosphere is alive with such opinions right now, don’t know what they are talking about. …

“It’s not a strategy,” said [bankruptcy attorney John Knox] in an interview Jan. 4. “All Chapter 9 does is give you breathing space to rearrange your affairs.”

That includes a municipality’s general obligation debt and, yes, collective-bargaining agreements. The bankruptcy judge is there to help the parties negotiate a plan of adjustment, not as some avenging angel intent on gutting the police union.

Finley is silent on whether Central Falls’ bondholders should share in the pain during her proposed bankruptcy restructuring. If the city’s retirees take a haircut on their $80 million in promised benefits, would its bondholders be forced to do the same on the $31 million they’re owed? That idea – and the potential fallout if it happened – likely sends a shudder through bondholders and public finance directors alike.