City of Providence, Rhode Island May Face Bankruptcy/Receivership

It is widely known that the State of Rhode Island is facing a fiscal crisis of gargantuan proportions. But Rhode Island has survived financial disaster before. In 1991, Rhode Island faced the state-wide collapse of its Credit Unions and other financial institutions.

That crisis was attributable to one man - Joseph Mollicone, a banker who embezzled $13 million dollars from the Rhode Island Share and Deposit Indemnity Corporation. The RISDIC was supposed to operate much like the FDIC (Federal Deposit Indemnity Corporation), that assures the funds deposited into most banks in the United States. In essence, Mollicone cleaned out the assests and bankrupted the RISDIC.

On January 1, 1991, the about to be sworn in new Governor, Bruce Sundlum, issued the edict to close down all of the financial institutions backed by the RISDIC. That left over 300,000 residents without access to their money. It took some people eighteen months to get their money back. But eventually, most people recovered from this crisis.

Today there are many causes of the dire financial situation in Rhode Island. The free-fall of house values, fall of the stock market, skyrocketing unemployment, and state-wide flooding of the "once in a hundred years" category have all contributed. Cities are literally going bankrupt. It is a very serious financial crisis. Even the state's Broadcast Channel 6 is seeking legal relief from its creditors

One Rhode Island town, Central Fall, Rhode Island , has already gone into receivership because the town simply did not have the funds to stay "in business". A city or town will go into "receivership" instead of "bankruptcy", but they are very similar procedures.

Receivership "is a type of corporate bankruptcy in which a receiver (a person) is appointed by bankruptcy courts or creditors" (in this case the State of RI), to run things and get the finances under control. Eventually control will be given back to the duly elected town officials.

In Providence Wednesday night, the City Council (by a very narrow margain) voted to approve a $284 million dollar property tax levy. This proposal would increase the city's property tax rate by a huge 25% and repeal a tax break for some qualifying multi-family dwellings.

This tax increase would obviously bring a tremendous extra burden to a city that already has a record-setting number of vacant and boarded up homes. The Providence City Council is making this decision to help fill the growing deficit that threatens to put even the Capital City of Providence into receivership.

Mayor David Cicilline has promised to veto the plan. The increased tax rate threatens to force even more families out of their homes and could have the opposite effect of its purpose - that is fewer people may be able to pay property taxes.

The only time the federal government has stepped in to bailout a specific city was in 1975. President Gerald Ford extended New York City a generous line of credit (about 2.3 billion dollars) to remain solvent. Although some indicators are inching upwards, it is not clear what the financial fate of Providence will be by the end of 2010.