Case Study-Central Falls Bankruptcy

The State of Rhode Island General Laws, Title 44, section 44-35-10, "Balanced municipal budgets. states" The operating budgets for all cities and towns shall provide for total appropriations which do not exceed estimated receipts, taking into account any general fund surplus or deficit estimated to be carried over from the Current fiscal year. The Rhode Island Auditor General in a publication commenting on a section of Title 45 of the laws, states that the purpose of the law is to ensure that municipalities monitor financial operations on an ongoing basis, execute a rapid response to budget problems, and maintain a balanced budget.

Unfortunately, the Rhode Island statute and the Auditor General's admonition were not sufficient to prevent a small Rhode Island City- Central Falls (population 19,000) from filing for bankruptcy. A "going concern" note to the city's June 30, 2010 Financial statements stated that the city had filled a petition on May 19, 2010 for appointment of a Receiver, citing "fiscal insolvency due to revenue shortfall, state budget cuts, and unaffordable collective bargaining agreements and pension obligations the city operated under receivership during the fiscal year ended June 30, 2011 and file for bankruptcy in August 2011.

The following summary financial statements and related comments regarding Central Falls' General Fund are derived from the Central Falls comprehensive annual financial reports (CAFR) for the four fiscal years ended June 30, 2010. (We condensed various items for other revenues and other departmental expenditures into "All other captions for ease of presentation Dollars are in millions and may not add due to rounding)

	2007($)	2008($)	2009($)	2010($)
Revenues
Property Taxes	9.715	9.947	10.328	10.357
Intergovernmental	5.740	5.348	4.545	3.822
All other	2.617	1.839	2.728	1.664
Total Revenues	18.072	17.134	17.601	15.843
Expenditures
Public Safety	6.045	6.357	6.804	6.819
Employee benefits	4.046	5.022	3.704	3.597
Retirement	1.269	1.276	1.271	1.260
Debt Service	1.883	1.878	2.583	2.596
All Other	4.129	4.577	3.843	4.163
Total Expenditures	17.372	19.110	18.210	18.435
Excess, revenues over (Under) expenditures	0.700	(1.976)	(0.609)	(2.592)
Transfers in		0.378		0.249
Excess, (deficiency), after transfer in	0.700	(1.598)	(0.609)	(2.343)
Fund balance, start of year	1.738	2.438	0.840	0.231
Fund balance, end of year	2.438	0.840	0.231	(2.112)

Comments

1. Central Falls participates in three retirement plans (a) Municipal Employees (MERS), a state of Rhode Island administered agent multiple employer retirement system, that covers substantially all Central Falls employees other than police officers and fight the City Police and Fire PRF 15) which was effective for police and firefighters hired before July 1, 1972 and which had 57 retirees and beneficiaries and o active members as of June 30, 2010; and (c) Police and Fire Private P&F Private), which covers police and firefighters hired after July 1, 1972 and which had 76ctive members and 79 retirees and beneficiaries as of June 30, 2010. Central Falls also operates a pose-employment medical benefit plan that provides lifetime benefits to substantially all retired employee and spouses
2. The caption "Retirement in the foregoing operating statements shows the annual city contributions to the P&F 15 plan. The notes to the financial statement report that, as of July 1, 2010, the plan had assets of only $1.251 million-barely sufficient for one year's benefit payments and liabilities of $14.218 million
3. The caption "Employee Benefits in the foregoing operating statements shows the city's contributions for all other employment benefits, as follows:
   1. The city's contribution for MERS in 2010 was $207 thousand. The city contributed the amount Willed in each of the four years. The notes to the 2010 financial statements show the plan to be reasonably well-funded, with assets of $5.212 million vs. bls of 56.657 million.
   2. The city's contribution for P&F Private in 2010 was compared with an annual required contribution of $2.573 million (The annual required contribution includes an amount representing the pension benefit earned by employees during the year and an amount for amortization of the unfunded liability) This plan was severely underfunded at June 30, 2010, with awes of 56.517 million vs. liabilities of $40.109 million, a funded ratio of 16.25. The city also contributed so to this plan in 2009, less than 50% of the required contribution in 2005, and only 25% of the required contribution in 2007
   3. The largest element of "Employee Benefits is for medical and dental benefits, which totaled $2.925 million in 2010. The benefits apparently cover both retired and active employees. The plan for retired employees is a pay-as-you-go plan, because an actuarial valuation of as July 2009 shows the plan to have zero assets and $32.012 million of liabilities
   4. Other Employee Benefits" expenditures include relatively small amounts for Social Security, Medi- care, compensated absences, and unemployment compensation

Required:

1. Comment on the economic and demographic conditions of Central Falls and the likelihood that those conditions played a role in the weak financial condition of the city. Visit www.census.gov, search Quick Facts, select Rhode Island, then Central Falls, and compare Central Falls statistics with those of Rhode Island and the United States as a whole. Consider such factors as percent population change, education level, health, and income and poverty. (Assume that readily available current statistics have not changed materially since 2011.) Also, Google "central falls ri crime."
2. Review the financial data (including the comments) shown in this case study. Describe the apparent indicators of fiscal stress leading to Central Falls' filing for bankruptcy protection in August 2011.
3. Visit the Central Falls RI website, click on Departments, then Finance, and note the availability of both the annual budgets and annual CAFRs. First, review the Central Falls General Fund budget for the fiscal year ended June 30, 2010 and check to see if it is balanced. Then, review the budget to actual comparison (pages 8-9 of CAFR) and the budgetary comparison schedule (near end of CAFR) for the year ended June 30, 2010. Isolate several significant differences between budgeted and actual revenues and expenditures that warrant study for possible evidence of weak budgeting practices and managerial controls.
4. Comment on the language of the Rhode Island law regarding balanced budgets in terms of its ability to ensure avoidance of bankruptcy.