Central Falls, R.I., struggles to step back from financial abyss

Last year, the state took over Central Falls - a city of 19,000 residents with an unadjusted unemployment rate of 15 percent - stripping the mayor of his keys to City Hall and the rest of his authority. That move came after every teacher was fired at the underperforming high school, with most of them rehired later.

As state officials try to dig Central Fall out of its financial hole, negotiations are ongoing with labor unions and retirees and cuts are being sought from every corner of the budget. Without major concessions, bankruptcy is a very real possibility. Bankruptcy can take a toll on a city’s reputation and put stress on neighboring communities, which might have to step in to provide services.

“It’s a difficult, painful, and wrenching process,’’ said Richard Levin, an attorney who has been advising the city council in Harrisburg, Pa., which has been flirting with bankruptcy because of more than $280 million in debt on its trash incinerator, several times the size of the city’s annual budget. “Some people think bankruptcy is like a bath or a free pass. That’s not it at all.’’

Orange County, Calif., a wealthy community south of Los Angeles, became the largest municipality in US history to declare bankruptcy in 1994 in large part because of risky investments.

Vallejo, near San Francisco, went the same route in 2008. The city is poised to emerge from bankruptcy protection after renegotiating costly union contracts and restructuring its debt.

Legislation allowing broke cities and towns to seek bankruptcy protection under what’s known as Chapter 9 was born of the Great Depression when, according to the National Bankruptcy Review Commission, more than 2,000 municipalities defaulted. Entire jurisdictions were swallowed up by others.