Small US town files for bankruptcy

Central Falls is one of a handful of US local governments facing insolvency in the wake of the financial crisis.


    Once, the tiny city of Central Falls, in the US state of Rhode Island, was a proud boomtown - textile mills and other manufactures dotted the landscape and anchored it in prosperity. Today, its website may still claim it to be a "town with a bright future" but the reality is a different story one where the money ran out and the city had to file for bankruptcy.

    What broke Central Falls was its way too generous pension system mixed up with a good amount of mismanagement. In 1972, the town created its own pension plan for public safety workers like firefighters and police officers. They used their collective bargaining power to negotiate agreements, which allowed them to retire after 20 years of service and receive 50 percent of their final year’s salary and full health benefits.

    But Central Falls is mostly poor with just 19,000 residents living in only 2.2 square kilometres of space most annual household incomes hover around $20,000.  When the recession hit, the town just couldn't cope with its entitlements and the revenue couldn’t even start to cover the cost.  

    Sinking under 80-million dollars of debt, the mayor was stripped of his powers a year ago and the city was put in the hands of three different receivers sent from the state who tried all the tricks in the books.

    The local library and community centre were closed and all city services cut to the bone. Taxes were raised by almost 20 per cent but that only pushed people and business away. For months, the receiver tried to reach a deal with the 160 retired public safety workers. They were asked to accept cuts to their pensions of up to 50 per cent. Of course they said no and the agreement fell through.  

    "Although we did everything feasible to avoid the necessity of filing for bankruptcy, in the end we were left with no other practical option," said the city’s receiver Robert Flanders on the day of the announcement.

    Declaring bankruptcy means the union deals will be cancelled and the city will be able to restructure its debt, but for the retirees, this means their pensions will be cut in half. 

    Donald Cardin, who retired as a fireman at the age of 46, says this is unfair and feels that people are unfairly blaming retirees for the city's financial crisis.

    "They think we're fat cats because we're retired but I met my contractual obligations. I worked my 22 years, I fulfilled my obligations to the city and the contract and now I’m losing the benefit that I worked for. “

    And these are not golden benefits by any means. Donald lives in a modest house and his pension will fall from $32,000 a year to $16,000. At his age he'll be able to work for longer but the older retirees are not that lucky. 

    It is still quite rare for towns or countries in the US to end up this way, but some fear that what happened here might be a warning of more pain to come. Across the United States, cities, counties and States are going broke, struggling to recover from the recession and, in some cases, years of fiscal mismanagement. In Washington the debt ceiling fights and discussions over possible cuts to Social Security and health benefits show how difficult it is to reinvent a system after too many years of living beyond its means. 

    "It's easy for people to make promises with other people's money that will not have to be paid until many years in the future," says the Receiver Flanders. "But now, as we say in America, the chickens are coming home to roost." 



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