Rhode Island City Voids Union Contracts in Bankruptcy

As expected, but sooner than expected (less than a day), we have this: Central Falls Collective Bargaining Contracts Voided In Bankruptcy.

The state-appointed receiver overseeing cash-strapped Central Falls filed for bankruptcy Monday morning on the city’s behalf in an effort to help it get back on its financial feet.

Receiver Robert G. Flanders announced the step at City Hall Monday. He was joined by Governor Chafee, who says the move is needed to address Central Fall’s finances.

All contracts with municipal workers and retirees, including the fire and police departments, are immediately voided.

Retirees must begin to pay 20 percent of their medical coverage effective immediately, as Flanders proposed when he met with the city’s retirees July 19.

“Everything was done to avoid this day,” Flanders said.

“Services have been cut to the bone. Taxes have been raised to the maximum level allowable.

“We negotiated with Council 94 and the police and fire unions, without success, attempting to reach voluntary concessions, and we tried in vain to persuade our retirees to accept voluntary reductions in their benefits.”

In papers filed with the bankruptcy court, Flanders said, “the city’s to the point where it is insolvent. The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased.”

Deficits are expected to grow in each of the coming years, he said.

“On or before August 21, 2011, the city will lack sufficient revenues or cash flow to pay its bills as they become due, and then will not be able to pay its debts as they become due in every succeeding month for the remainder of the fiscal year (which ends on June 30, 2012) except for the month of October 2011… In addition, the city is no longer able to access capital markets.”

Flanders says that through the Chapter 9 proceeding, “the city seeks to develop and implement a plan of debt adjustment that will return the city to solvency and viability. To do so, the city must modify its debts and obligations so that they do not exceed the city’s projected revenues.

“The motion to void the city’s three collective bargaining agreements,” Flanders states, “is a critical step toward achieving that objective.

“Simply stated, the city cannot restore balance to its budget unless it restructures its labor costs as a critical element of any plan to debt adjustment. In FY 2012, the largest city expenditure is the cost of labor, and the largest portion of the city’s labor costs is paid to union employees.”

“Given today’s action,” General Treasurer Gina M. Raimondo said in a news release, “the governor and I are even more resolved to pursue comprehensive pension reform this fall to protect other state and municipal retirees and employees as well as taxpayers from the heartache of the drastic measures being taken in Central Falls. None of these groups did anything wrong and allowing this to happen again is unacceptable.”

The above is an update to my earlier post Central Falls Rhode Island Files Chapter 9 Bankruptcy; Court Asked to Negate Collective bargaining Agreements; Vallejo Precedent

Central Falls was bankrupt years ago and I said so repeatedly. The costs on taxpayers to delay this bankruptcy have been severe.

Once states realize that bankruptcy is not tantamount to statewide Armageddon, there will be a flood of city bankruptcies.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

2 replies
  1. Just me says:

    My guess is that the lawsuits are forthcoming with a pack of salivating lawyers fighting to represent the union.

  2. Richard Rider says:

    A somewhat unnerving part of the article’s rationale is that “taxes have been raised to the maximum level allowable.” In other words, in Rhode Island, they have some sort of legal limit to which taxes can be raised.

    In most states (certainly California) there are often no such legal limits on local governments — except (in CA) for local sales, income and and property taxes. That leaves open parcel taxes, sin taxes, utility taxes (a rich mother-lode) T.O.T. hotel taxes and a seemingly infinite number other options — not to mention “fees.”

    The inference is that IF taxes could be raised more, perhaps the labor contracts could not be voided. Oh dear!

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