Updated March 29 at 6:25am

Providence Chapter 9 "unavoidable"


PROVIDENCE - Providence, Rhode Island’s capital and biggest city, probably will seek bankruptcy court protection to deal with a budget deficit, Robert Flanders, the state-appointed receiver for nearby Central Falls, said Tuesday.

“I don’t see how they can get out of it without going there,” said Flanders, a former state Supreme Court justice and a partner at Hinckley, Allen & Snyder LLP. He put Central Falls into bankruptcy in August and has used the city’s legal status to tear up contracts with city workers and cut pension benefits.

Providence Mayor Angel Taveras has put pressure on Brown University and other nonprofit organizations to help close a budget gap of at least $20 million, while Governor Lincoln D. Chafee is pressing lawmakers for action on measures to help communities curb pension costs. Unsustainable retiree expenses helped push Central Falls into insolvency.

Moody’s Investors Service cut Providence debt a step to Baa1, third-lowest investment grade, yesterday citing its “strained” finances.

“Bankruptcy is not the preferred option for restoring Providence’s fiscal health; it is the last option, and I will do everything in my power to prevent it from happening,” Taveras said in a statement in response to a request for comment on Flanders’ remark. “I respectfully disagree with Judge Flanders that bankruptcy is unavoidable.”

More Common

Chapter 9 bankruptcy may become more common in the near future, Flanders said in an interview before a Bond Buyer conference on distressed cities in Philadelphia.

Once municipal officials become aware of how useful a tool court protection can be, it will be hard to resist, he said, suggesting as many as 20 cities a year may take the option, if it’s open to them.

Entering bankruptcy remains a rare move by municipalities. Since 1937, 635 municipalities have sought Chapter 9 protection, according to James Spiotto, a lawyer with Chapman & Cutler LLP in Chicago. Some states prohibit communities from doing so.

Legal analysts consider bankruptcy as something to be avoided at all costs. Governments already have the tools they need to deal with debt and budget issues, Richard L. Sigal, who teaches at the University of Connecticut Law School and is a partner at Hawkins Delafield & Wood LLP, said during a panel discussion at the conference.

‘Lawyer’s Heaven’

Bankruptcy is “a lawyer’s heaven and doesn’t seem to be worthwhile,” said Sigal, who helped resolve New York City’s fiscal crisis in 1975. Even Orange County, Calif., the biggest municipal bankruptcy before Jefferson County, Ala., entered Chapter 9 last year, could have gotten its finances in order by borrowing, he said.

“Bankruptcy is never a desirable option,” Chafee said Tuesdayin a statement. “It has broad implications and consequences in terms of bond assessments, property values, and negative national perception.”

“That is why the state of Rhode Island is taking every possible step to help our municipalities -- including our capital city of Providence -- avoid bankruptcy,” Chafee said.

Many municipalities are at risk of defaulting on their debts, said William Rhodes, a partner at Ballard Spahr LLP who moderated a conference panel discussion. Some community leaders must choose between paying bondholders and maintaining vital services, such as police and fire protection, he said.

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Judge Flanders is right. Except, the receivers should be paid a flat fee, not paid by the hour. What's the incentive to get it done and over with?

Governor Chafee has seen to it that the bondholders will not feel any pain, so that leaves only the taxpayers and employees. And, it is unlikely that the employee unions and retirees will act any differently than those from Central Falls. In that regard, Providence is exactly like CF. The outcome will be the same.

Wednesday, March 28, 2012 | Report this


Fact #1: Governor Hickenlooper signs a bill to give a raise to state legislators. Fact #2: State legislators steal contracted, earned, fully-vested, and accrued retirement benefits from elderly in our state (SB 10-001, COLA theft bill.)

Our values are warped.

Recall that Colorado Public Employees Retirement Association (PERA) retirees are suing the state and PERA over the theft of contracted, fully-vested, accrued pension cost-of-living (COLA) benefits that were earned over 30 years. In the first round, a Colorado district court judge has ruled against the plaintiffs (saveperacola.com) in an incredibly flawed opinion. That ruling is under appeal.

Note that prior to the Legislature’s taking of the contracted COLA retirement benefit the Colorado Attorney General issued an opinion that this action would contravene Colorado case law, and that the taking of contracted benefits from fully-vested pension members would be unconstitutional. Also, note that in 2008, in a Denver Post article, PERA’s General Counsel Greg Smith was quoted stating that taking the COLA would likely be illegal. For some reason he had a change of heart, and testified in favor of the COLA theft bill in 2010.

In spite of all this, the Colorado General Assembly donned its blinders and adopted the COLA theft bill, and like lemmings the Colorado PERA Board of Trustees followed PERA’s Executive Director Meredith Williams over the cliff. Colorado PERA led a parade across the state and managed to frighten a few PERA retirees into supporting the proposed theft. They then used the support of this fraction to bolster their case for the theft of contracted benefits from all other PERA retirees.

To ensure passage of SB 10-001, PERA hired an undetermined number of lobbyists to join a number of union lobbyists (total 12 to 20?) PERA used pension member assets to finance the theft of contracted retirement benefits from these same members. That is insane. PERA corralled the public unions into supporting the COLA-theft bill, and then rammed the bill through the process. Colorado PERA and the General Assembly were informed hundreds of times that the proposal was prima facie unconstitutional.

The initial decision in this case, that of the district judge is incredibly flawed. Read the decision and see if you don’t agree. The district judge does not seem to understand that Colorado has an “automatic COLA” rather than an “ad hoc” COLA that could legally be altered by the pension plan sponsor. The judge states in his decision that Colorado PERA retirees have a contractual benefit to their base benefit, but not to the COLA benefit. He argues this in spite of the fact that the COLA benefit is set forth in statute with the same force of law as all other PERA pension statutory provisions. The COLA benefit is an earned benefit identical to all other earned PERA benefits. Judge Hyatt argues that since the COLA rate has changed in the past it can be diminished in the future.

The judge does not seem to understand that increasing a COLA benefit is not a taking, however, diminishing a COLA benefit harms the beneficiary and is therefore a taking. The fact that a COLA benefit has been increased in the past does not grant the state the power to violate the pension contract.

If Judge Hyatt were correct (that giving something to a person allows you to later legally take something from that person) then few pension COLA provisions in the nation would be considered contractual, and these provisions have been upheld as contractual in courts around the country.

PERA members earned the 3.5% COLA that was set forth in Colorado law. Many PERA members literally paid for this 3.5% COLA set forth in the law when purchasing service credit. If the state and other PERA employers did not like the terms of the pension contract with employees and retirees, they should not have become a party to the contract. However, once a party to the contract, they are bound by its terms.

Again, many PERA members sent money to PERA for the purchase of “service credit” (essentially paying for extra years of service in the pension.) The members who made these purchases did so based on the “guaranteed” (PERA’s words) COLA rate. If these PERA members had any idea that the state would renege on its contractual obligations, lowering the value of their purchase, they would not have given PERA the money. They would have left the funds in their 401K accounts.

Incredibly, in his decision the district judge contradicts one of his prior decisions in which he ruled that the COLA benefit was contractually protected. See below this post from “Alan B” in the on-line version of the Denver Post:

“What truly confounds me in this case is that Judge Hyatt ruled the opposite in my divorce case. Which only shows what I have read before that it takes the courts 5 to 10 years to figure something out. He ruled that my wife was entitled to her share of PERA discounted at the legal rate assuming that PERA would pay my pension compounded at 3.5 percent for the rest of my life. Her lawyers argued that her social security could not be guaranteed yet the PERA could be. Judge Hyatt ruled for her and in this case he ruled the opposite of what he had ruled in the current case. Is the 3.5 percent annual adjustment guaranteed or not, Hyatt has spoken on the record, yes and no.”

What happened in Colorado was, in my opinion, a crime.

Thank God the courts are beginning to correct the outright, unabashed theft of public pension benefits that has occurred in a number of states across the U.S. Read below the clarity that this Florida judge brings to the matter, it is truly breathtaking.

The Florida Legislature attempted pension reforms that were not nearly as aggressive, in terms of risk of unconstitutionality, as those adopted by the Colorado General Assembly. Nevertheless, the Florida Legislature has been smacked down by the courts.

Here are some noteworthy portions of the Florida ruling:

“This court cannot set aside its constitutional obligations because a budget crisis exists in the state of Florida. To do so would be in direct contravention of this court’s oath to follow the law.”

“To find otherwise would mean that a contract with our state government has no meaning.”

“There was certainly a lawful means by which they could have achieved the same result.”

“Florida law is clear that a legislature can, as part of its power to contract, authorize a contract that grants vested rights which a future legislature cannot impair.”

“The elimination of the future COLA adjustment alone will result in a 4 to 24% reduction in the plaintiffs total retirement income. These costs are substantial as a matter of law.”

“Where the state violates its own contract, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the state’s self-interest is at stake.”

“All indications are that the Florida Legislature chose to effectuate the challenged provisions of SB 2100 in order to make funds available for other purposes.”

“If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”

“The Takings Clause is intended to prevent the government from forcing some people alone to bear public burdens, which in all fairness and justice should be borne by the public as a whole.”

“Defendants are further ordered to reimburse with interest the funds deducted or withheld . . . from the compensation or cost-of-living adjustments of employees who were members of the FRS prior to July 1, 2011.”

Here’s a link to the decision in Florida:


Eventually Justus will prevail in Colorado. Read all about the Colorado theft, and support the lawsuit at saveperacola.com. Friend saveperacola at Facebook!

Thursday, March 29, 2012 | Report this
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