By Ryan C. Wood

On August 1, 2011, The City of Central Falls, Rhode Island, made history by joining the short list of municipalities to file for bankruptcy protection under Chapter 9, Bankruptcy Case No. 11-13105.  Central Falls joins another recent municipal bankruptcy that is wrapping up, The City of Vallejo, California.  Central Falls will have to rely upon some of the rulings from the City of Vallejo case given that few municipalities have actually filed under Chapter 9 of the bankruptcy code.  This result in little case law or precedent to help guide Central Falls through this process.  Central Falls is facing a $5.6 million shortfall for fiscal year 2012 and their general fund will be depleted in August 2011.  Hopefully municipal bankruptcy filings will not become common place in the United States.  Unfortunately the reductions in Federal spending, reductions in sales tax and property tax, reductions of other sources of income for local governments do not make the outlook very good.

Like many individuals that have to file for bankruptcy protection under Chapter 7 or Chapter 13, Central Falls tried to stay out of bankruptcy court.  Central Falls raised taxes on its population of approximately 20,000 residents a staggering 19.32% in 2011.  Central Falls also restricted overtime pay, reduced the number of city employees eligible to receive benefits, eliminate benefits for part-time employees, closed the public library, closed the community center and even shared services with surrounding communities to try and prevent filing for bankruptcy protection.  These drastic cuts in services and benefits to existing city employees still did not close the projected depletion of their general fund or $5.6 million budget shortfall.

On August 1, 2011, Central Falls filed a motion with the Bankruptcy Court seeking approval to reject collective bargaining agreements with the Central Falls Police Department Fraternal Order of Police, International Association of Fire Fighters Local 1485 AFL-CIO and the Rhode Island Council 94 American Federation of State County and Municipal Employees AFL-CIO Local 1627.  According to Central Falls court documents this is the single most important step in getting their fiscal budget balanced and eliminating future shortfalls.  Two of these three collective bargaining agreements expire in June of 2012 while one agreement has already expired.  One of the requirements for a municipality to file for bankruptcy protection under Chapter 9 is that a good faith effort is made to negotiate concessions and try to reach an acceptable agreement prior to the bankruptcy filing.  Unfortunately Central Falls and the unions were not able to agree on concessions that would provide enough cuts to allow Central Falls to stay out of bankruptcy court.  The main issue to watch will be if Central Falls goes after the retirement benefits of retirees of the three unions.  Time will tell.

You may obtain more information about personal and small business bankruptcy from our Redwood City Bankruptcy Lawyer or Chapter 7 bankruptcy lawyer in Redwood City.

By Ryan C. Wood, Attorney at Law

The answer is no, yes, and yes.  During recent budget sessions in the California assembly a representative suggested that the State of California should file bankruptcy.  It is not possible under the United States Constitution for a state to file for bankruptcy and discharge debts.  County governments and municipal governments are able to file for bankruptcy and reorganize their debts in Chapter 9 of the bankruptcy code.

What Government Entities May File for Bankruptcy?

Chapter 9 provides that municipalities may reorganize their debts.  The Bankruptcy Code defines a municipality as a “political subdivision or public agency or instrumentality of a State.”  Municipalities include cities, towns, villages, counties, taxing districts municipal utilities, water districts, school districts, bridge authorities, highway authorities and gas authorities.  Congress created this legislation during the Great Depression.  To date, the most famous municipality bankruptcy is Orange County, California.  The Bankruptcy Code has four other requirements: (1) the municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor; (2) the municipality must be insolvent, as defined in the Bankruptcy Code; (3) the municipality must desire to effect a plan to adjust its debts; and (4) the municipality must either: obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under chapter 9, negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan, be unable to negotiate with creditors because such negotiation is impracticable, or reasonably believe that a creditor may attempt to obtain a preference.  The Bankruptcy Code defines insolvency as a municipality generally not pay its debts as they become due unless such debts are the subject of a bona fide dispute, or unable to pay its debts as they become due.

Why Would a Municipality file for Bankruptcy?

So why would a municipality file for bankruptcy protection?  Like corporations or individuals the money coming in is not enough to pay ongoing expenses and service or pay for the existing debt of the municipality.  Why not just raise taxes?  How municipalities receive funding is very complicated and the ability to just raise taxes is very restricted to product us, the taxpayers.  The purpose of the municipal bankruptcy is to get rid of unfavorable financial arrangements such as unexpired leases, executory contracts and even restructure collective bargaining agreements and retiree benefit plans.  Many cities and counties are being squeezed by generous retirement packages for retirees, but can filing Chapter 9 reduce these expenses?

A problem with a municipality filing for Chapter 9 bankruptcy is that so few municipalities have done so.  There is not a lot of case law or decisions to know what can and cannot be accomplished when a municipality files Chapter 9.  In the recent bankruptcy filing of Vallejo, California, the City of Vallejo, according to court records, the city obtained a favorable ruling that California State law did not protect the contracts of city employees.  The City of Vallejo did not try to reduce retiree pension plans, a huge expense the City of Vallejo will struggle to pay for years to come.  Jefferson County, Alabama could be the largest municipal bankruptcy case if they choose to file in the next week or so.  Hopefully the economy will pick up enough so that many municipalities across the United States will realize increase revenues and prevent an epidemic of municipal bankruptcy filings.

For more information about municipal bankruptcy, Chapter 7 bankruptcy or Chapter 13 bankruptcy, contact our Fremont Bankruptcy Lawyers or San Mateo Bankruptcy Lawyers toll free at 1-877-963-9543.