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Flanders tells the ups and downs of receivership

April 27, 2012

WOONSOCKET – Former Judge Robert G. Flanders Jr. pulled no punches in relating the impacts of a state-run receivership and bankruptcy on a local community while appearing before the Woonsocket Taxpayers’ Coalition Thursday evening.
Yes, Flanders told the gathering in the Elks Hall on Social Street that his role as state receiver for Central Falls has resulted in lower costs to balance the community's troubled budget, but he has also had to raise taxes and eliminate some local services such as the senior center and public library.
He has also supplanted the local mayor and city council, showing them to the “curb” outside City Hall, so to speak, and as a result Central Falls has lost local democracy for the short term, he explained.
The removal of the mayor and other elected authorities came only after they attempted to end his control of the city's finances and is not necessarily a foregone conclusion under the state's new municipality economic recovery law but always a possibility, according Flanders.
“So, this is not a process that is all good or all bad,” Flanders told the gathering of about 125 people seated around tables in the hall. “It's a mixed bag of things so you only go there as a last resort.”
While giving his overview of the state's receivership process, Flanders stressed that while a community's leaders might initially request the option of state control of fiscal matters, as was the case in Central Falls, only the state can decide if such a plan will be implemented.
He also countered a view expressed before a council meeting earlier in the week that a community itself can seek the final step of entering federal bankruptcy court and maintained only the state-appointed receiver can take that step under state law.
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“In Rhode Island, only the receiver has the authority to take a city or town into bankruptcy,” Flanders said.
The state also has the authority to determine when the receivership is concluded; Flanders said the state's Supreme Court has already upheld that fact as the result of a challenge Central Falls' elected officials filed to regain control of the community. Central Falls remains in receivership today and Flanders projected the process would last until at least June.
“The state is the gatekeeper here, not the local officials,” Flanders said, explaining the receivership's local authority.
It is possible the receiver would seek to work with a cooperative mayor or a city council willing to take the necessary steps to cut spending and balance a local budget, but Flanders maintained the state makes all such decisions once a receivership is declared.
“Once it happens, the potential is there for the local officials to be reduced to an advisory status,” he said.
That aspect of lost local authority has been an issue in Central Falls since he assumed control but Flanders said the decision to take over a community is not treated lightly by the state and occurs only after several triggering events take place.
The lowering of a community's bond rating to junk bond status is one trigger, as is a community's inability to present a balanced budget to the state, he explained.
The state also has several options for intervention before it actually pursues a federal bankruptcy filing for a community. Flanders explained that those options include the creation of an independent budget committee to work out a new budget or the appointment of a fiscal overseer to handle that process as a second step.
The naming of a receiver is the third step toward a bankruptcy and that process involves an attempt to work out savings with all the community's affected parties, its municipal employees and service providers.
But once a bankruptcy is declared, Flanders said, the receivership has authority to take immediate action in correcting the community's deficit, whether by increasing taxes, laying-off employees or modifying contracts and related benefits with the approval of the bankruptcy court.
The law does protect municipal bond holders by giving them first standing status in the payment of available revenues, but Flanders maintained that the budget correction power of the receivership is extensive for those outside that rule.
“The city can pay who it wants to pay and who it does not want to pay,” he said.
In Central Falls — a community of one square mile of land that has seen its tax-base undermined by the loss of industrial and commercial businesses — Flanders was forced to raise taxes immediately by 19 percent and also to layoff one-third of the city's employees to begin balancing its budget.
The receiver has no authority to sell a community's assets, but the official can negotiate reductions in contractual benefits with union employees and retirees before a bankruptcy is sought.
The problem Central Falls faced, Flanders said, was that its leaders had granted municipal employees “very rich benefits” but never raised taxes to fund them. As a result, he was forced to cut retiree pensions to 55 percent of their original benefit, a change affecting some elderly retirees who relied on their pensions for all their needs. But Central Falls, like other Rhode Island communities, had cases of people retiring after 20 years, or on disability pensions for stress and other disabilities, who continue to collect their pensions even while holding other jobs.
Once the receivership filed for bankruptcy, Flanders said, he was able to impose changes addressing such fiscal concerns immediately. The bankruptcy process allows for hearings and appeals of such changes but Flanders maintained the system does provide a community with the opportunity to put a system in place that’s more fair to taxpayers.
The resulting budget plan for Central Falls is expected to save the community $30 million over the next five years, a savings worthy, according to Flanders, of the $2 million expense for the receivership and its related attorneys and consultants.
Although allowing a municipality to address its troubled finances, a bankruptcy can also leave a community with the “stigma” that its officials could not fix the community's problems on their own and required outside help. That, over time, can represent a lowering of property values for residents greater than what they have already experienced, according to Flanders.
Flanders, while noting he has no role in determining how Woonsocket seeks to address its own fiscal problems, did take questions from the attending residents and explained the potential local impacts of a receivership.
When the Rev. Dorian Parker asked why the senior center or library might be cut, Flanders said that any expense would be considered as a way to solve a community's fiscal problems. The law also allows for the reductions in employees and benefits that took place in Central Falls, he noted.
“All of these are spending cuts that led the city to a balanced budget,” he said.

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