The smallest city in the smallest state in the nation is in a big financial hole.
Rhode Island's Central Falls has filed for Chapter 9 bankruptcy. With an annual budget of under $17 million, the densely populated community of roughly 19,000 people is facing $80 million in unfunded liabilities for pensions and retiree benefits.
The city is in debt with projected annual deficits of $6 million looming.
It's a bleak financial picture for a community carrying the motto: "A City with a Bright Future."
Aiming to set things right, the state has appointed an official to oversee the bankruptcy process. Former Rhode Island Supreme Court Justice Robert Flanders is vowing to put the city back on firm financial footing. He believes a long history of mismanagement and a lack of foresight led to the current budget disaster.
"It was many years in the making. For over 20 years the city entered into agreements to provide employee benefits, including pension and other post employment benefits, that were too rich for a poor city in Rhode Island to sustain," said Flanders.
"Part of the reason this happens is you've got a public collective bargaining system where you've got unions making donations to politicians, politicians naturally wanting to accommodate the unions by giving them benefits and the like and there's no immediate apparent effect of that," Flanders said. "It's all pushed off to the future and the ramifications of these agreements don't get felt immediately."
At a public hearing last week, Flanders and his team defended the reorganization plan which includes tax hikes and significant layoffs, including eliminating the positions of police and fire chief in favor of a single public safety manager to oversee both departments.
Flanders has asked the federal court to reject collective bargaining agreements, calling for increased contributions to health care plans and the significant slashing of pensions. Some retirees could see losses of roughly 50-55 percent.
Union representatives are still at the table trying to negotiate.
"We're concerned that promises don't get broken and we do recognize that if some promises cannot be fulfilled that the parties hopefully can mitigate a situation that is livable on all those aspects, whatever aspect we're talking about," said Joseph Andriole, vice president of the Rhode Island State Association of Firefighters.
He argues the first priority when cuts are being made is to ensure the safety of the Central Falls' firefighters and the community. Beyond those key worries, the focus is on preserving benefits longtime public servants were promised and ensuring current employees have a secure
future. Andriole fears future generations will be deterred from service if secure retirement plans are not offered.
"Where's that leave our country if you can just walk away from your obligations? I think cooler heads have to prevail. We have to take a big look at it and hopefully we'll be able to get out of this in a mutual agreement, if you will," said Andriole.
"There was an agreement. A promise made. It should be kept," argued J. Michael Downey, president of the Rhode Island Council 94 of the American Federation State, Country and Municipal Employees. The union represents more than 30 municipal employees in Central Falls.
One of the most unique parts of the current bankruptcy effort shields bondholders from losses, preventing stakeholders from suffering the sharp cuts lenders often see in bankruptcy situations.
State leaders put the rule in place to calm the credit markets.
"I think the intent here was to protect the average taxpayer because every city or town has to go to borrowing sources from time to time to cover its operating costs, and if municipal borrowing costs get raised because one city or town goes into bankruptcy then taxpayers all over the state would get hit with raises in taxes," Flanders said. "I think you have to look at this not as something that favors bondholders and banks but really looks out for the interest of the average
Downey is not happy with the plan and believes workers are suffering the brunt.
"I think the state of Rhode Island was more concerned about the people that it owed money to, the bonders and debtors. They put them first and employees last and as someone who works to represent workers and a dignified workplace I find that insulting and I don't think it should
happen," said Downey.
City residents will also take a hit. They're facing a 4 percent tax increase every year for the next five years. Efforts are underway to keep the library and community center up and running with reduced funding.
Many communities across the nation are in financial trouble, facing expensive pension obligations and rising health care burdens while state and federal aid dwindles. Flanders said a number of Rhode Island towns and cities are financially strapped. He believes Central Falls offers a warning.
"Yes, this could be a microcosm of what other cities in Rhode Island, and of course America, are looking at if they don't get their house in order," Flanders said.
Though the process will be difficult, Flanders hopes to pull Central Falls out of the red by the end of the year and help the community live up to its motto.
Molly Line joined Fox News Channel as a Boston-based correspondent in January 2006.