Rhode Island Bond Law Thought to be First of its Kind

A source quoted in a recent Wall Street Journal article claimed a Rhode Island bond law passed in July may be the first of its kind in the U.S.  The law ensures bond holders receive payment before other creditors following a municipal bankruptcy.  On Monday, Central Falls, RI filed for Chapter 9 bankruptcy due to soaring pension costs.  Officials hope the new law will keep investors interested in debt sold by other Rhode Island cities. 

Rhode Island’s New Municipal Debt Law

The new RI law amends existing statutes related to the indebtedness of towns and cities.  The amendments grant debt service appropriation a first lien on cities’ ad valorem taxes and general fund revenues.  This virtually guarantees bond holders will receive their payments. 

Payment of other obligations, however, is not as certain.  Under the bankruptcy receiver’s current plans, pension checks may be reduced by 50 percent to shore up Central Falls’ finances.  An average Central Falls pension pays about $32,000 annually.  The city faces $80 million in unfunded pension and healthcare liabilities.  Its annual budget is $17 million.    

Trouble in Other Cities (And Counties)

Across the country, local government budgets are sagging under the weight of pay and benefit obligations, as well as debt deals gone awry. 

  • Annual payments to retirees consumed half of Providence, RI’s tax collections in 2010.  Only two other Rhode Island cities, Central Falls and Woonsocket, devoted more tax dollars to pension payments last year.         
  • Harrisburg, PA faces a large payment on a debt-financed trash burner in September.  The city may not have enough funds to make the payment. In its case, bankruptcy is not an option, as  Pennsylvania state law prohibits small and mid-sized municipalities deemed “financially distressed” under Act 47 from filing for Chapter 9 relief.
  • Jefferson County, Alabama is on the precipice of what could be the largest municipal bankruptcy in U.S. history.  Several years ago, the county sold bonds to finance sewer improvements.  To hedge the risk associated with a fluctuating interest rate, county leaders entered into interest rate swaps – financial arrangements in which parties trade payment obligations.  Jeffco exchanged its variable rate payments for fixed payments.  Following the credit market collapse in 2008, the variable rate it would otherwise pay plummeted.  Meanwhile, its fixed rate obligation remained constant, leaving the county deeply underwater.  State and county officials have been fighting off Chapter 9 ever since.  They were unable to decide on a course of action regarding the sewer debt in a meeting yesterday, August 3.  Another meeting will be held on August 12, at which time the county commissioner indicated a decision about bankruptcy will be made.   

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