Fitch Ratings assigns an 'A' rating to the following City of Cranston, RI's (the city) general obligation (GO) bonds:
--$23,610,000 million, GO refunding bonds, 2010 series B.
The bonds are expected to sell via negotiation on Oct. 5, 2010 and will refund all of the city's outstanding series 2004 Qualified Act GO bonds and all outstanding series 2000 GO bonds.
In addition, Fitch affirms the following ratings:
--Approximately $4.8 million series 2000 GOs at 'A';
--Approximately
$21 million series 2005 GOs at 'A';
--Approximately $20.4 million
series 2006 GOs at 'A';
--Approximately $3 million series 2010A GOs
at 'A'.
The Rating Outlook is Negative.
RATING RATIONALE:
--The Negative Outlook reflects the decline in
the city's unreserved general fund balance as a result of state aid cuts
and deficit operations within its school department as well as the
city's increasing, and severely under-funded, liability in its closed
city-run pension plan.
--To date, the Effective expense reduction
initiatives and implementation of tax increases have helped stave off
more severe budget implications due to revenue shortfalls.
--The
city is the third largest populated city in the state and benefits from
wealth levels in excess of state and national levels, low taxpayer
concentration and low to moderate debt levels with an above-average
amortization rate.
--The city's other post employment benefit
(OPEB) liabilities are estimated to be very high.
WHAT COULD TRIGGER A DOWNGRADE?
--Inability of the school
department to successfully implement its deficit elimination plan
including achieving balanced operations which would ease related budget
pressures for the city.
--Failure to maintain balanced city general
fund operations.
--Lack of meaningful improvement by the city in
reaching fully funded pension ARC payments over the near term.
SECURITY:
The bonds are secured by the city's full faith and credit
and unlimited taxing authority.
CREDIT SUMMARY:
Cranston is a primarily residential community
located just south of the city of Providence and with a population of
81,686, is the third most populated city in Rhode Island. The city
benefits from its location to major highways and is committed to
economic development to improve the city's tax base and create
employment opportunities for its residents. The current top 10
taxpayer's concentration is diverse and is a low 6% of taxable assessed
value (AV). The city's fiscal 2009 taxable AV was revalued at $7.3
billion which is a 15% decline from the prior year's AV as a result of
the overall real estate market pressures. Wealth levels are in line with
the state with median household income at $57,181 and per capita income
at $27,672 equivalent to 103% and 97% of state levels. The city's
unemployment rate is high at 12.2% in August 2010 compared to 11.8% the
prior year, but only slightly exceeds the state's rate of 11.8% as of
August 2010, which is well above the national rate of 9.6%.
The general fund has experienced steady increases in its revenues since 2005 due primarily to property tax increases. As was the case with all Rhode Island municipalities, the city suffered from mid-year state aid cuts in 2009 and 2010. As a response, the city's expense reduction initiatives included layoffs resulting in a 15% reduction in staff. For fiscal 2009 the city's general fund posted a $1.75 million deficit primarily as a result of state aid cuts. For fiscal 2010 the city expects positive operating results of approximately $200,000 and an additional boost of $2.5 million as a result of a write-off of a negative receivable balance accumulated over the last nine years.
In 2008, the school department sued the city pursuant to the Caruolo Act, lost and appealed the case to the Supreme Court. The Supreme Court affirmed the decision in favor of the city. Then the city entered into a deficit elimination plan with the school that followed the mandates of the performance audit required by the court in the suit. The city agreed to provide the school with $1.8 million for each of fiscal years 2009 and 2010 to make up for what the performance audit determined to be under-funding of the school department. While the city has maintained a healthy fund balance for the last five years, the unreserved general fund balance dropped in fiscal 2009 due to the restricting of funds to offset the school department's cumulative fund balance deficit. As part of the negotiation between the city and school department, the city will maintain reserved fund balances to offset the school department deficit. The school department is awaiting state approval of its deficit elimination plan which provides for balanced operations beginning in fiscal 2011 and elimination of the estimated cumulative deficit over four years. The $6.8 million in reserved city general funds held in abeyance will become unreserved as the school successfully implements the plan.
The city reported an unreserved fund balance totaling $12.3 million, or 6.7% of spending, for fiscal 2009, down from $19.6 million in 2005 (12.2%). The school department's fund balance at fiscal year end 2009 was a negative $8.9 million. The school department anticipates an additional deficit in fiscal 2010 of $2.5 million, which is above its previously reported mid-year projection, again, due to a final-hour decision by the state to decrease school aid at the end of the city's fiscal year. The city will increase its restricted general fund reserves by this amount for fiscal 2010. The cumulative school department deficit projected for fiscal 2011 is $7.8 million but is expected to be reduced by $1 million from proceeds of the sale of the city's former police station, leaving $6.8 million to be eliminated over four years in equal installments of $1.7 million beginning in fiscal year 2012. Beginning in fiscal 2012, the school department expects an increase in state aid due to the recently revised school funding formula and expects to use these funds to supplement its deficit elimination payments.
For the fiscal 2011 budget, the city's council approved a 9% increase in the total tax levy to make up for the significant reduction in revenue which included the loss of $11 million in motor vehicle reimbursement from the state. The council also approved a budget drawdown of $1.4 million from general fund reserves to balance its budget. The administration is planning for more expense reduction initiatives to meet its budget. The city also approved an increase in the school department's budget of 3.78%, even though the state has permitted local government's to reduce school appropriations by 5%.
The city's debt levels are low with debt to market value at 1.1% and debt per capita at $1,076. The city has no immediate borrowing plans. GO debt amortization is above average with 69% of par maturing in 10 years. The city's closed defined benefit pension plan continues to be severely underfunded. The total unfunded liability as of July 2009 was a very high $244 million (up from $208 million in 2007). The city has indicated that the invested assets have increased in value since last year but are still below 2007 values. The pension funding level is very low at 15.1% as of June 2009 and for fiscal 2010 the city contributed $20 million or 87% of its ARC. In fiscal 2009, 2008 and 2007 the city contributed 95%, 96% and 100% of its ARC, respectively. The city has budgeted an 83% ARC for fiscal 2011. The city has made 100% of its ARC for the last three years to the state operated municipal and teacher's pension plans for its employees. For its OPEB liability, the city contributed $3.3 million or 81% of a total ARC of $4 million in fiscal 2009. This followed contributions of 103% and 105% in 2008 and 2007, respectively. The unfunded OPEB liability as of June 2009 was a high $50.1 million. The school department does pay as you go funding and paid $3.5 million in fiscal 2009 and 2010. The school department's unfunded OPEB liability was a high $35.8 million as of July 2008.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, LoanPerformance, Inc., and IHS Global Insight.
Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16,
2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated
Dec. 21, 2009.
Applicable Criteria and Related Research:
U.S. Local Government
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492470
Tax-Supported
Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
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