News for Credit Professionals

Template for Municipalities?: Judge Gives Nod to Chapter 9 with Retiree Haircuts

In what could catch the attention of municipalities struggling with entitlement costs throughout the nation, a judge has approved a deal between public employees and a small Rhode Island city that was largely encouraged by a Chapter 9 filing in mid-2011.

U.S. Bankruptcy Judge Frank Bailey has approved a deal forged by Central Falls and many of its retired employees to voluntarily reduce the level of benefits they are receiving. The judge also approved a new collective bargaining agreement where current police and fire employees there are taking a haircut on future benefits.

Retiree benefits/pensions obligations were the overwhelming cause for Central Falls to file in 2011 as communities throughout the country fret about escalating costs for retiree health care and pensions.  Though unable to negotiate concessions beforehand, the Chapter 9 inspired public workers and retirees to take significant voluntary cuts because it, in theory, means they will keep more than if the benefits were slashed to the proverbial bone during the bankruptcy reorganization. It is estimated the newly forged deal will help the city save more than $1 million this year, which has been characterized as critical for Central Falls to resume any semblance of operational normalcy.

With more cities struggling with a host of financial challenges, most significantly entitlements, the issue could likely become increasingly common in the 26 states that allow municipal bankruptcy through Chapter 9 filings. While few believe Chapter 9 will become an epidemic, it certainly bears watching given the state of budgets out there.

“There are big problems for a lot of these municipalities, especially the collective bargaining agreements that have built in generous retirement obligations,” said Bruce Nathan, Esq., of Lowenstein Sadler PC. “I think you will see this continue and increase well beyond this year. If state laws can be complied with, why wouldn’t [struggling municipalities] do it if this is an option for them to deal with their financial problems?”

Brian Shappell, NACM staff writer