Has Central Falls turned a corner? It’s starting to look that way after a series of positive developments this month.

Last week, the bankrupt city signed new agreements with its unions to cut costs and stabilize its budget. A tentative agreement on pension cuts has been reached with its retirees. And Tuesday, its Adams Memorial Library said the city will rejoin the state lending system on Dec. 1 thanks to a flood of donations from celebrities and others.

“This is all good news for the city and its taxpayers,” retired Supreme Court Justice Robert Flanders, Central Falls’ state-appointed receiver, told WPRI.com on Tuesday. “It definitely is a new beginning for the city.”

Governor Chafee’s spokeswoman, Christine Hunsinger, echoed the sentiment. “The governor believes this is what happens when people come to the table and work together to solve a problem,” she said. “He’s very grateful for all the hard work the unions and Judge Flanders’ team did in Central Falls.”

(more…)

Vallejo, Calif., is finally out of Chapter 9 bankruptcy, leaving Harrisburg, Pa., and our own Central Falls as apparently the only two cities in the country going through a municipal restructuring in court. Alas, Vallejo’s residents are still finding ways of getting into trouble, the Vallejo Times Herald reports:

At about 6 a.m., a groundskeeper of Blue Rock Springs Park heard a man screaming when he arrived at work. He then called the police to investigate.

Upon arrival, police found a 21-year-old man stuck in a child’s swing, which has two leg holes.

The man told police that he had been stuck in the swing since 9 p.m. Friday after he allegedly made a $100 bet with his friends. He proceeded to lube himself with laundry detergent to get into the swing, police said. …

Vallejo firefighters then were called to rescue him by cutting the swing chains off. He was then transported to Kaiser Permanente Vallejo Medical Center, where firefighters used a cast cutter to cut the swing off his body, firefighters said.

Those Vallejo firefighters are clearly earning whatever restructured compensation they received under the CBA restructuring approved by the Chapter 9 judge.

(h/t: Josh Barro)

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)

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, 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)

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.