The tiny cash-starved town of Central Falls, Rhode Island, has been taken over by the state, faces debt defaults and is looking at possible bankruptcy. Now, it stands to lose its identity altogether.

The smallest city in the smallest of the 50 U.S. states, covering just 1.5 square miles with a population of 19,000, Central Falls could merge with neighboring Pawtucket.

Some say such a strategy is the only way to keep providing basic services to residents in the city, also among the state's poorest locales.

The state-appointed receiver for Central Falls -- the city has been under state control for almost a year -- first championed the idea of a possible merger, and it remains a viable, if poignant, option for Central Falls, as well as for cities, towns, school districts and even mosquito-eradication districts around the nation facing budget deficits and long-term liabilities.

We can no longer fund these little entities. We have to look at the efficiencies that we can get from merging towns, said Gina Genovese, co-founder of the group Courage to Connect New Jersey, which advocates town consolidation as a money-saving mechanism.

Genovese, who served as mayor of Long Hill Township, New Jersey, from 2005 to 2007, said the state could reduce its 566 municipalities to fewer than 125 towns and cities.

In New Jersey, places as diverse as affluent Princeton, Merchantville and impoverished Camden, a high-crime city forced to lay off half its police last year, have looked at consolidating services.


In Michigan, Oakland County has taken over the police department of cash-strapped Pontiac, and there are suggestions it could go on to absorb the entire city.

In Illinois, Governor Pat Quinn has suggested the state, which has more entities with taxation powers than any other, consolidate school districts to save money.

In Rhode Island, the state-appointed receiver said consolidation might be the last best hope for Central Falls, which has an annual budget of $16.8 million,

In nearby Pawtucket, a city of about 71,000 residents with fiscal challenges of its own, Mayor Donald Grebien has taken a wait-and-see approach and declined to comment.

An editorial on local news website advocated last year that Central Falls become a section of another city or town, so residents could benefit from a broader tax base.

Keeping it as its own little financial hell only works to stigmatize homeowners, students and the future, the editorial said.

But others see consolidation as unfortunate.

I was born here. It would bother me to see the name Central Falls disappear, said Patrick Szlastha, who sits on the city council and has been cutting hair in Central Falls since 1961.

But, he added: I don't know of anybody who's got a definite formula to get this city back on track.

The hurdles facing Central Falls are formidable. Incorporated in 1895, it had a thriving past as a textile and tannery center, making everything from soda bottles to brooms.

But a long decline in manufacturing hollowed out the city's revenue base, and the recent economic downturn exacerbated years of fiscal mismanagement.

It has a high level of fixed costs, yet only a limited ability to raise revenue. The median family income is just about half of the U.S. average, and a third of Central Falls' residents live below the poverty level.

Earlier this month, the town suffered a fresh blow when Moody's Investors Service cuts its credit rating and warned there is a higher likelihood of a bankruptcy.

Although bankruptcies and defaults are rare in the $2.9 trillion municipal bond market, the downgrade could force Central Falls to pay higher interest rates if and when it borrows money.

This week, the state announced the closure of the city's library and community center.

(Editing by Ellen Wulfhorst and Jerry Norton)