Central Falls, Rhode Island, the smallest city in the smallest state in the US, is making a big splash in the world of municipal bankruptcies.
On August 1, 2011, Central Falls commenced a chapter 9 case. But the act of filing for bankruptcy is not the story. Over 600 municipalities have sought refuge in bankruptcy since 1938. The real story is that Central Falls is attempting to use chapter 9 to actually fix its main fiscal problems, which are its pension and other retiree obligations.
Last week, Central Falls filed its proposed plan of adjustment with the bankruptcy court. This is the document that sets out what Central Falls’s obligations will be after it emerges from chapter 9. This plan needs to be voted on by impaired creditors – those parties receiving less than a full recovery, including the unions, employees and retirees. Consequently, Central Falls’ bankruptcy still has a way to go. However, based on the plan, Central Falls is demonstrating that it is serious about fixing its problems.
Here are the top 5 questions to ask about the Central Falls plan of adjustment.
1 – Who Is Impacted by the Plan of Adjustment? Both unsecured creditors and the lessor of an emergency vehicle are impaired under the plan, but the focus of the plan is on the city’s employees, retirees and unions. The unfunded pension obligations of Central Falls are stifling and, without a meaningful modification, Central Falls will not be able to continue to provide services to its citizens. As a result, the plan is designed to enable the proposed modifications of the collective bargaining agreements and pension obligations.