[Guest post by DRJ]
In my view, there are two ways for local, state and federal governments to resolve their fiscal problems and deal with their underfunded pensions and entitlements. One way is to limit benefits and get serious about budgeting. The other is to file for federal bankruptcy relief or state receivership.
The City of Central Falls, Rhode Island, has chosen the receivership option:
“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 may become a legal battleground because unions, in particular, fear the domino effect if governments choose to abrogate their contracts via bankruptcy or receivership. If that happens, maybe these courts will have stiffer legal spines than those in the GM and Chrysler cases.