As has been widely reported in the media, the long-troubled municipality of Central Falls declared bankruptcy this week. Interestingly, the filing happened less than a week after Vallejo, CA, the most recent high-profile civic bankruptcy, emerged from chapter 9 and announced that, despite a 3-year process that cost a reported $11 million, had indeed saved money by going through the process.
The relationship between these two events is complex: Central Falls’ fiscal issues go back years, and the bankruptcy filing was likely completed (though not filed) some time ago. However, the Vallejo precedent was clearly on the minds of city officials, and according to court reports, Central Falls’ attorney cited the Vallejo precedents repeatedly in his arguments during the initial status update Wednesday.
As much as we talk about the ‘stigma’ of bankruptcy, the real barrier to chapter 9 filings by cities is the uncertainty of results. Elected officials are notoriously averse to risky actions, especially when the pain (negative press around a filing) is immediate and the gain (a strong balance sheet post-bankruptcy) can be years away. As precedents are laid out and the process speeds up, the uncertainty and timing issues will lessen, and bankruptcy will look relatively more enticing. This does not mean a flood of bankruptcies are coming, but it does mean the dynamics of the decision to file are changing.
Not all is lost for Central Falls creditors, either. Much has been made of the new Rhode Island law, which purportedly supports bondholders, and the city has made a point of saying that they will protect their GOs. The debt, at about $20 million, is a relatively small part of the city’s liability structure. However, it all needs to be worked out in court, which means uncertainty at the very least.
