Central Falls, Rhode Island, one of a handful of U.S. cities and counties facing fiscal collapse in the wake of the economic recession, filed for a rare Chapter 9 bankruptcy on Monday.
The bankruptcy filing, a risky and potentially expensive move that could freeze the city out of the U.S. municipal bond market, marks a symbolic blow as state and local governments struggle to pull themselves out of the recession.
The smallest city in the smallest U.S. state made the filing as it grappled with an $80 million unfunded pension and retiree health benefit liability that is nearly quadruple its annual budget of $17 million.
"This is a wake-up call for other struggling towns," said Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University. "States should be looking at Rhode Island and saying, 'How can we avoid this?"
Still, dire predictions of mass municipal defaults made late last year by Wall Street analyst Meredith Whitney have not come to pass. A string of failures could rattle the $2.9 trillion U.S. municipal debt market