Updated March 31 at 6:31pm

Rhode Island sets standard for bondholders’ love

Central Falls, the first city in Rhode Island’s 222-year history to go bankrupt, is preparing to exit court protection after 13 months by keeping bondholders whole while raising taxes and cutting workers and pensions. More

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GOVERNMENT

Rhode Island sets standard for bondholders’ love

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Central Falls, the first city in Rhode Island’s 222-year history to go bankrupt, is preparing to exit court protection after 13 months by keeping bondholders whole while raising taxes and cutting workers and pensions.

The financial and political support Central Falls got from state officials makes the case unique among municipal bankruptcies in the past year from Alabama to California.

Yet “there are great lessons to be learned here,” said Theodore Orson, who represented the state-appointed receiver overseeing the bankruptcy and is a lawyer with Orson & Brusini in Providence. Chapter 9 of the U.S. Bankruptcy Code, which localities can use to cut debt as companies use Chapter 11, “can be effectively utilized to fix what appeared to be a broken city,” Orson said.

A proposed resolution is set for review in federal bankruptcy court in Providence Sept. 6. The city’s plan to cut debt doesn’t impose losses on bondholders and may let them recover legal fees. State lawmakers also put investors ahead of other creditors by letting them put liens on city tax revenue. Rhode Island helped ease the pain of retirees and workers, providing $2.6 million to cushion pension cuts.

By contrast, Alabama state lawmakers refused to let Jefferson County raise taxes, prolonging the biggest U.S. municipal bankruptcy by months. California took away redevelopment tax money, contributing to two cities’ insolvency.

The Central Falls approach “is a good sign for bondholders of Rhode Island bonds compared to, say, California,” said Alan Schankel, head of fixed-income research at Janney Montgomery Scott LLC, an investment bank in Philadelphia.

Last year, there were 14 local-government insolvencies nationwide, including special tax districts, compared with six in 2010, data compiled by Bloomberg show.

For Central Falls, the difficulties date to at least 1991, when the state took over its school district’s finances.

“I will never be able to retire because they had to protect their precious bond rating,” said Don Cardin, 47, a former fire department battalion chief. His monthly pension fell to $2,100 from $2,800 and is set to drop to $1,250 in five years. Like many government workers, firefighters in the city don’t participate in the federal Social Security system.

The approach to resolving the bankruptcy will help the city regain access to the $3.7 trillion municipal bond market, said Schankel.

“Central Falls will be penalized by the market going forward for awhile, but they have a shot at crawling their way back,” Schankel said. “They will be able to borrow because the process worked out OK for bondholders.” •

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