June 17, 2010

Update: Rhode Island Municipalities May be Able to Open Existing Contracts, if Democracy is Suspended First

Carroll Andrew Morse

Attorney Joseph Larisa, who helped initiate the current "municipal receivership" action in Central Falls, is quoted by John Hill of the Projo as advising the Central Falls City Council to consider going along with the new process defined in the "fiscal stabilization" law signed by the Governor last week...

He cautioned that it was up to the City Council, not him, to decide if the city challenges the law. But he said he would advise the council that the new law would accomplish the same things the city had sought with the receivership filing.

For the city, he said, the key provision in the new law is one that allows a receiver appointed by the state Department of Revenue to file for federal bankruptcy on behalf of an insolvent municipality, if all other efforts fail to balance its budget.

Larisa said a federal bankruptcy filing, which carries the ability to break union contracts, or at least the threat of it, was needed to win the kinds of concessions the city needs to close its budget gap.

The law lays out a three-step process for "stabilizing" a community that is having fiscal troubles. Ideally, if problems can be fixed at an earlier step, the community doesn't have to proceed to the next step; presumably, Central Falls would have to go through steps 1 and 2, before ending up in step 3 full-blown receivership. (See update below).

The specific steps specified in the "fiscal stabilization" law are...

  1. ...the fiscal overseer stage where a "fiscal overseer" is appointed who is something more than an adviser to a town or city government. Local elected officials retain most of their formal powers, but both the overseer and the state's Director of Revenue get final vetoes over the municipal budget. The overseer is also required to be involved in all new contract negotiations, but is given no special authority regarding existing contracts.

    If the fiscal overseer can't fix the problem (with his or her super fiscal overseer powers that mere mortal elected officials apparently don't possess), then we go to...

  2. ...the budget commission stage where a commission is created, with 3 members appointed by the state's Director of Revenue, and 2 drawn from elected officials of the town. All decisions by the budget commission are made by majority vote. Formally, the elected town or city government still exists, but it must defer to the "budget" commission, whenever the budget commission decides anything...
    In addition to the authority and powers conferred elsewhere in this chapter, and notwithstanding any city or town charter provision or local ordinance to the contrary, the budget commission shall have the power to...exercise all powers under the general laws and this chapter or any special act, any charter provision or ordinance that any elected official of the city or town may exercise, acting separately or jointly; provided, however, that with respect to any such exercise of powers by the budget commission, the elected officials shall not rescind or take any action contrary to such action by the budget commission so long as the budget commission continues to exist.
    And if the budget commission cannot solve the problems (with their super-budget commissioner powers), then we go to...
  3. ...the receivership stage where the Director of Revenue appoints a single individual who is given the power...
    ...to exercise the powers of the elected officials under the general laws, special laws and the city or town charter and ordinances relating to or impacting the fiscal stability of the city or town including, without limitation, school and zoning matters; provided, further, that the powers of the receiver shall be superior to and supersede the powers of the elected officials of the city or town shall continue to be elected in accordance with the city or town charter, and shall serve in an advisory capacity to the receiver.
    So the citizens of a city or town still get to participate in local elections -- just not for the single person who has absolute authority to make all decisions about taxes, budgets or any other municipal matter.
Now, the receiver is granted a power that could ultimately lead to the reopening of existing contracts:
The power to file a petition in the name of the city or town under Chapter 9 of Title 11 of the United States Code, and to act on the city's or town's behalf in any such proceeding.
...i.e. the power to file for municipal bankruptcy, but this is not a power given to the budget commission, or to the fiscal overseer, or to the schmucks in town or city government acting on their own.

So the most basic question is, why is suspension of municipal democracy viewed as a necessary or even preferred condition for the filing of bankruptcy?

UPDATE (6/18/10):

Apparently the "fiscal overseer" and "budget commission" stages are completely optional. The law contains a provision says that if a fiscal emergency is severe enough, in the opinion of the Director of Revenue and the Auditor General, they can move immediately to suspend municipal democracy and appoint a receiver, without meeting any of the conditions specified in the earlier steps of the process...

In the event the director of revenue determines, in consultation with the auditor general, that a city or town is facing a fiscal emergency and that circumstances do not allow for appointment of a fiscal overseer or a budget commission prior to the appointment of a receiver, the director of revenue may appoint a receiver without having first appointed a fiscal overseer or a budget commission.