PROVIDENCE - Central Falls, the city that sought bankruptcy protection last year, is on course to erase a deficit yet may remain insolvent if school spending can’t be reined in, according to a state-appointed receiver.
“The school is the dog and the tail is the city,” said Robert G. Flanders Jr., the receiver. “It’s only on the school side where work still needs to be done.”
Flanders, 62, wants U.S. Bankruptcy Judge Frank J. Bailey in Providence, the state capital, to extend his authority to the separately run Central Falls School District, with a projected $1 million fiscal 2013 deficit. The receiver has cut the city’s workforce by 32 percent and lowered pensions by more than half for many, while bondholders have continued to be paid. A law passed last year put city debt payments ahead of wages.
“We still can’t believe” that the Legislature, controlled by Democrats, took such a step, said J. Michael Downey, the president of Rhode Island Council 94 of the American Federation of State, County and Municipal Employees. “We were outraged that the General Assembly decided to treat bondholders better than employees.”
Rising pension costs led the state to adopt an overhaul that pushed back the full retirement age to 67 for most workers, suspended cost-of-living increases for pensioners and offered 401(k)-type savings plans to cut unfunded liabilities by about 40 percent. Lawmakers are considering a proposal to apply a similar formula to cities and towns including Providence, the state capital, where Mayor Angel Taveras has asked for the help.
Bankruptcy a Boon
Since Aug. 1, bankruptcy protection has helped Central Falls, Flanders said in an interview in Providence. It has let him threaten to dump contracts and motivated union leaders to offer concessions. While a previous receiver, Mark Pfeiffer, negotiated almost $1 million in labor givebacks, that didn’t go far enough to close the gap. Under accords struck in November, the city will save another $1 million a year.
Chapter 9 of the U.S. bankruptcy code also let Flanders cut pension payments to 141 city retirees, reducing the city’s cost by about 75 percent to $1.3 million a year from $5 million. He also closed the municipal library, which has since reopened with a volunteer staff, combined the top police and fire department jobs into one, and reduced elected officials’ salaries.
For some retirees, the cuts went as deep as 55 percent of what they had been receiving. Flanders, a partner at Hinckley Allen & Snyder LLP in Providence and a former state Supreme Court justice who took over from Pfeiffer on Feb. 1, 2010, said the alternative to such drastic steps was “payless paydays” for remaining city workers.
Workers Take Brunt
“The only people who are suffering are the employees,” said Downey, the union leader. “They really care about the work they do and the city of Central Falls and they were willing to make concessions to keep the city moving.”
In 2010, Rhode Island’s pension system had just 59 percent of the assets needed to cover projected payments to more than 60,000 state workers, teachers and judges, short of the 80 percent level considered adequate by actuaries. Retirement plans run by seven other states, including Connecticut, were in worse shape. The average “funded ratio” was about 75 percent in 2010, according to a study by Bloomberg Rankings.
Following the changes he spearheaded in Central Falls, the city is on its way to fiscal viability, Flanders said. He suggested court protection may be best for other distressed communities, dismissing the stigma associated with the move.
“Far from being a bad thing, it has been a tremendous tool for achieving a balanced budget,” the receiver said.
Just a square mile in size, Central Falls had a deficit of about $5.6 million in August on a budget of $16.4 million, and an unfunded liability to retirees of about $80 million, Flanders has said. The city has about $20.8 million in general-obligation debt rated Caa1, its fifth-lowest grade, by Moody’s Investors Service. The municipality has continued to make debt-service payments, Moody’s said in a December report.
A Central Falls security maturing in July 2025 most recently traded Dec. 29 with a yield of 6.69 percent, up from 6.61 percent on Dec. 21 and 4.1 percent when it was sold in September 2007, according to Bloomberg Bond Trader prices.
If the judge grants his request for control of local schools, with about 3,650 students, Flanders would gain the authority to negotiate a new teachers’ contract and cut administrative jobs. A judge may rule on his request as soon as next month. In the meantime, Flanders and school union leaders say they are trying to work out a new accord.
District educators are working without an employment agreement. A union representing about 300 of them is fighting Flanders’ move, citing the state’s fiscal control over the district since 1992. Since then, the schools have been run by a state board, not a locally elected committee, and Rhode Island taxpayers finance most of the $42 million annual budget.
That arrangement shows that the school system isn’t part of municipal government, according to Frank Flynn, president of the Rhode Island Federation of Teachers and Health Professionals.
The district serving the city of about 19,000 drew national attention two years earlier, when Superintendent Frances Gallo fired all the high school teachers to spur better performance. Months of unrest followed, drawing President Barack Obama into the dispute when he said Gallo’s action was justified to help underserved students. An agreement that ended the controversy enabled most of the educators to return to their jobs.
Cost Cuts Planned
If he gets control of the district from Judge Bailey, Flanders said he’ll pare down its budget by consolidating some functions with those performed by city workers.
“We hope to make very dramatic changes,” Flanders said. He’s trying to collaborate with school unions to reduce costs without dictating new contract terms, he said.
“There will be similar multimillion deficits if we don’t do something,” Flanders said.
Under a debt-adjustment plan given to the court, Central Falls will be able to balance its budget for the next five years. With control over school spending and approval of his plan from the judge, the city may emerge from bankruptcy within six months, Flanders said.