@tednesi Ted Nesi The Dow is down 4% as I write this. But I’m sure the market will turn around once Central Falls releases its Ch9 plan at 3.
Central Falls, Rhode Island is a down on the heel community that has become the epicenter of the battle to preference municipal bondholders over retired municipal workers in bankruptcy proceedings. This is a tale of the state of Rhode Island turning federal bankruptcy law and pension law upside down.
When an entity becomes insolvent and seeks the protection of a bankruptcy court it throws itself within the processes and rules of the federal bankruptcy court. Cities are not liquidated in a Chapter 9 bankruptcy but outstanding claims against a community are reduced so that the community can pay them all. Traditionally in bankruptcy proceedings pensions are treated similarly to bondholders and other secured creditors.
In a new and surprising move the state of Rhode Island passed General Laws § 45-12-1 and enshrined in law that bonds are secured by a Rhode Island statutory lien on property taxes and general fund revenues. In essence the state created a post-facto super senior preference for bondholders. The state changed the rules after the game was underway.
The stated concern of state officials was that if Central Falls bondholders were “haircut” in bankruptcy court then bond market access for all cities in the state would close or be severely curtailed. In essence the state wanted to ring fence the assets of the bondholders assets against any harm that a bankruptcy proceeding would subject them to.