Fitch Ratings takes the following rating action on the City of Woonsocket, RI's outstanding general obligation (GO) bonds:
--$117.8 million GO bonds rated 'BBB-' are placed on Rating Watch Negative.
SECURITY
The bonds are a general obligation of the city and backed by its full faith and credit.
KEY RATING DRIVERS
INTERNAL CONTROL DEFICIENCIES: Deficiencies in the school department's internal fiscal controls have led to a projected fiscal year 2011 school fund deficit of $2.6 million, contrary to prior reported estimates of a positive ending balance.
CONTINUED DEFICIT OPERATIONS: The school fund is projecting a deficit for fiscal 2012 and has very limited expenditure reduction options available to address the imbalance.
POTENTIAL STATE OVERSIGHT: While Fitch views the potential implementation of state oversight positively, the level of the state's concern is an indication of the severity of the city's fiscal problems.
LIMITED REVENUE GENERATION FLEXIBILITY: Revenue generation is limited and is reliant primarily on property taxes, currently at high levels. The city council, however, has shown willingness to tax at the maximum level.
WEAK EMPLOYMENT AND DEMOGRAPHICS: City demographics are weak with high unemployment levels, low income levels, and declining population.
HIGH DEBT: Debt levels are high with below-average amortization rates.
WHAT COULD TRIGGER A RATING ACTION
FURTHER FINANCIAL DETERIORATION: Significantly greater than estimated deficits materializing in the fiscal year 2011 audit may negatively affect the rating.
CONTINUED INTERNAL CONTROL PROBLEMS: An inability to implement solid fiscal controls, leading to improvement in financial operations and reporting, could also have a negative impact on the rating.
INADEQUATE RESPONSE TO DEFICIT: Failure to address fiscal year 2011 and projected current year deficits adequately and in a timely manner may lead to a rating downgrade.
LIQUIDITY CONCERNS: Evidence that near-term liquidity concerns have a longer-term impact is a negative credit factor.
CREDIT PROFILE
FINANCIAL OPERATIONS PLAGUED BY SCHOOL FUND DEFICITS
While the city's general fund expects a fiscal year 2011 surplus (budgetary basis) of $550,500 about 1% of general fund spending, the city's school fund is currently projecting a fiscal year 2011 deficit of about $2.6 million (4% of education fund spending). The deficit projection follows earlier estimates of a positive budgetary basis ending balance, and relates largely to personnel spending without corresponding resources to cover the expenditures, according to city management. The city also projects a current year school fund deficit, though an exact estimate has not yet been released.
After multiple years of general fund operating deficits, the city's unreserved general fund balance declined to a negative $3.7 million or about 7.4% of spending for fiscal 2010. The city's unrestricted school fund also saw multiple years of deficits. For fiscal year 2010, the school fund's negative unreserved fund balance of $8.6 million represented 13.7% of spending for the year.
A preliminary plan to address the fiscal 2011 deficit has been submitted to the state that provides for about $400,000 in near term cuts, with the remaining deficit amortized over five years. The state has not yet approved the plan, but has requested specific cashflow and expenditure information from the city. The state will likely provide an assessment following receipt of the requested data and a final fiscal year 2011 audit (expected by December 31st). One possible response may be the establishment of state oversight of city and school operations. Elimination of the fiscal 2012 deficit will also be addressed by the state.
In addition to budget deficits, the city narrowly averted a potential near-term liquidity issue. To meet payroll next Wednesday, the school system will require $1.7 million. The city's school appropriation of $13 million has already been drawn down and the next state funding allocation ($4.5 million) was not expected to be received until after the payroll payment was due. While the school system indicated that it had sufficient cash to meet its needs, a city analysis indicated that the city may have needed to provide cash assistance of $1.1 million from its available enterprise fund balances. The state has now altered its payment schedule, allowing for receipt of state funding on Tuesday, in time for the payroll payment.
FINANCIAL DETERIORATION IN RECENT YEARS
The city has faced significant financial pressures in recent years due to the recession, state fiscal problems leading to cuts in state aid, and increased employee pension, health and salary expenses.
In an attempt to stabilize its finances, the city has relied on deficit borrowing. To alleviate cash flow pressures and reduce deficit balances the city council approved a resolution on May 12, 2010 requesting approval from the state General Assembly for the city to issue deficit reduction funding bonds. The state approved the city's request and the city subsequently issued deficit financing BANs in July 2010, and $11.5 million in deficit financing bonds in February 2011 to retire the BANs.
The city's revenue raising flexibility is limited due to statewide annual limits on property tax levies causing additional stress on the city. The city was able to exceed the statewide property tax levy cap limit in fiscal 2011 with approval by 4/5ths of city council to make up for cuts in state aid revenues. To offset declines in city revenues in recent years, the city has been cutting expenses in all areas, including reduced payroll costs through attrition, furlough days, reduced salaries, and unpaid vacation days. In addition, the city has been working with its unions to reduce labor costs.
Woonsocket, located 15 miles outside of Providence, has a population of 41,186 and a tax base of about $1.8 billion. The city benefits from the presence of CVS which maintains its headquarters in the city and is the city's largest employer, employing about 5,780. Median household income of $41,001 and per capita income of $20,846 are below average at 74% and 73% of state averages, respectively. Unemployment rates continue to be elevated at 11.6% for September 2011, but have declined from 12.1% a year prior. Between 2000 and 2010, the city's population declined by about 5%, while the state's increased by less than 1% and the nation's grew by about 10%. Debt levels are high at about $3,184 per capita and 7.4% of market value.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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