* US prosecutors to recommend prison for mayor, backer
* City saw 156 foreclosures in 2008
* Central Falls filed for bankruptcy in 2011
By Hilary Russ
Sept 19 (Reuters) - Mayor Charles Moreau of impoverished Central Falls, Rhode Island, resigned on Wednesday and agreed to plead guilty to a federal fraud charge.
Moreau submitted his resignation to the Rhode Island Secretary of State early on Wednesday. A few hours later, federal prosecutors charged the mayor of the smallest city in the smallest U.S. state with fraud and filed his plea deal with the U.S. District Court in Rhode Island.
Beginning in 2007, as the number of foreclosed homes in the city began to surge, Moreau channeled all the work of boarding up the houses to his long-time friend and political contributor, Michael Bouthillette, prosecutors said in a two-count charging document.
Bouthillette also agreed to plead guilty to a charge stemming from the board-up scheme, prosecutors said. They also said they would recommend prison time for both men.
According to prosecutors, Bouthillette boarded up at least 167 homes from September 2007 to July 2009. He made "unreasonable profits amounting to hundreds of thousands of dollars," the criminal charging document said.
Moreau allegedly circumvented competitive bidding requirements by declaring homes to be emergencies needing immediate board-ups. In some cases, tenants were still living in the houses, and in other cases Bouthillette re-boarded houses that had already been closed up by owners, prosecutors said.
In return, prosecutors said, the mayor took kickbacks -- partial payment of a furnace for his Central Falls house and renovations and flood remediation to another home.
Central Falls fell into bankruptcy in August 2011 because of steep cuts in state aid, revenue shortfalls and unfunded pension and retiree healthcare liabilities of nearly $80 million.
By then, homes had been foreclosed across Central Falls. In 2008, there were 156 foreclosures in the city of about 19,400 residents, according to bankruptcy court documents.
The following year, foreclosures started to decline, dropping to 83 in 2009 and 55 in both 2010 and 2011. The document estimated the number of foreclosures in 2012 is 34.
"HE VIOLATED HIS OATH TO THE PEOPLE"
Moreau also dismissed concerns from city employees, telling one to "mind his own business," the document said.
"He violated his oath to the people of Central Falls. That has brought him down today, and deservedly so," said U.S. Attorney Peter Neronha in a statement.
Moreau did not answer his phone, and his lawyer did not reply to a request for comment. An attorney for Bouthillette did not immediately respond to a phone message.
Bouthillette will pay $160,000 to be used for community programs in Central Falls, and he agreed to forego collection of an additional $270,000 from the city that he might have received from boarding up homes, according to his plea deal.
Prosecutors will recommend that both men receive prison terms, a spokesman said, but a judge will ultimately hand down sentences.
Moreau and other local elected leaders were stripped of power by a state-appointed receiver, who later put the city into bankruptcy.
Central Falls' case was widely watched because it proposed balancing the city's budget by slashing pensions, raising taxes and leaving bondholders unscathed.
The receiver won court approval for the plan on Sept. 6, laying out an exit from bankruptcy just 13 months after filing.
The plan calls for the state-appointed receiver to retain oversight while passing power back to elected officials no sooner than January.
Gayle Corrigan, who runs the city day-to-day as the receiver's chief of staff, said that attorneys were reviewing the city's charter and Rhode Island's receivership law to determine the next step to fill the now vacant position.
"It's a terrible thing for the city," said City Council President William Benson Jr. in a phone interview.