There is a legal and political drama unfolding in Central Falls, Rhode Island, which has national implications for municipalities suffocating under union contracts and pension obligations, but which has received little attention outside Rhode Island.

As I posted two days ago, the City of Central Falls (whose slogan is “A City With a Bright Future”) filed for receivership, the state equivalent of bankruptcy. Rhode Island law does not allow a municipality to file for federal bankruptcy protection, but provides the state receivership alternative.

A temporary receiver was appointed by Rhode Island Superior Court Justice Michael Silverstein, an experienced business lawyer and well-regarded judge.

The Petition (embedded below) for appointment of a receiver details the financial problems, and highlights two items, pensions and union contracts.

First, Central Falls’ “actuarial accrued liability” for pensions exceeds $35 million, but there are only $4 million in assets. The annual contribution required by the actuaries for 2009 was $2.7 million, of which the City actually contributed $0. No funds are available for 2010 contributions.

Second, of the $18 million budget, $6.5 million is for employees with collective bargaining agreements. According to The Providence Journal, “City Solicitor John T. Gannon said the city is in the middle of all its municipal employee union contracts. Mayor Charles D. Moreau has been trying to negotiate concessions, he said, but without success.”

The implications of the Central Falls receivership are enormous. Under receivership, the receiver has the power to modify all contracts, including union contracts.

Central Falls could be the first union domino to fall, as municipalities see receivership (or bankruptcy, if permitted by state law) as the only viable option to escape unsustainable union contracts. As reported in The Providence Journal (emphasis mine):

“You have just seen the future,” said state Rep. Laurence W. Erhardt, R-North Kingstown. “The very fact that you opened the door to say it is a possibility, a couple other communities may not be far behind.”

While receivership does long-term damage to a city’s bond rating, the move also gives the receiver — named Wednesday was local attorney Jonathan N. Savage — unique power to modify union contracts and other debts.

“You’re getting rid of all the problems that have been created for generations, just by filing for receivership,” said Warwick Mayor Scott Avedisian, adding that he would never support the move for his city. “If you can wipe out an entire generation of contracts, and if Central Falls gets away with that, then what would be the incentive for other communities not to do the same?”

AFL-CIO secretary-treasurer Maureen Martin said a domino effect could be “devastating.”

Expect the court battle — and the negotiations with the unions — to be intense, because the stakes are so high. A court hearing is scheduled for June 9 as to whether the temporary receivership will be made permanent.

I will be following this case and will keep you posted.

Central Falls, Rhode Island, Petition for Appointment of Receiver

Update 6-14-2010: Unions Rescued In Rhode Island

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Related Posts:
Rhode Island City Files For Receivership
Dem. Legislator Files Arizona-Like Immigration Bill in Rhode Island
Unions Pushing States Toward Broken Promises

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