The smallest city in Rhode Island has landed in bankruptcy court after making retirement benefits promises it was unable to keep, a dilemma facing many municipalities across the country.

 

Central Falls, RI, with a population of about 19,000 people in one square mile, did not set aside enough money to pay for benefits promised to firefighters and police. The library and community center were closed, and city retirees were asked to accept smaller benefit checks, but Central Falls on Monday turned to the rare solution of declaring bankruptcy.

 

The move allows the city, with a 30 percent poverty rate, to be free of its full retirement obligations as it can break its contract with employees.

 

Central Falls is the second municipality in the United States to exhaust its pension fund, after Prichard, AL, The New York Times reported. Central Falls faces a $5 million budget gap for fiscal 2012.

 

The city has been operating under a state-appointed receiver, Robert G. Flanders, for a year. He predicted the pension fund for police and firefighters will run out of money in October. The general fund cannot absorb the costs, he said. The city operates its own pension fund rather than participating in a state-run system, and allows uniformed workers to retire after 20 years and receive free health care.

 

Flanders has 30 days to come up with a solvency plan. He wrote in court papers that the centerpiece of the plan will be reducing municipal labor costs, NBC 10 News reported.

 

The issue of unfunded retirement benefits is playing out across the country, and in Rhode Island, mayors in three other cities are planning to reduce retirees' checks. State Treasurer Gina M. Raimondo is calling for a total overhaul of the state pension system.

 

To settle skittish investors, the state legislature July 1 passed a law requiring municipalities to pay general obligation bonds before all other payments, including retirement benefits. The state's credit rating was not downgraded.

 

However, business leaders told the Providence Journal that they fear the bankruptcy filing will hurt the entire state's chances for economic revitalization.

 

"If you're an investor in this state, then you may look at this as a state's willingness to allow a municipality to go into bankruptcy," John C. Simmons, executive director of the Rhode Island Public Expenditure Council.

 

The Journal also spoke to Warwick Mayor Scott Avedisian, who said, "It's definitely going to have a negative impact. Overall, if you're going out to bond anytime soon, having a community fail is not a good selling point."

 

This week is not the first time this impoverished community made national news. Last year, the schools superintendent fired the entire teaching staff at its high school during an education reform fight. The teachers were ultimately hired back.

 

Other local governments in tough shape include Jefferson County, AL, which may also declare bankruptcy this week, and Vallejo, CA, which has been in Chapter 9 proceedings for three years, The New York Times reported.