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Pawtucket in need of $12.6 million in tax anticipation notes

January 22, 2012

PAWTUCKET — The City Council and the Finance Committee will meet tonight to discuss the city administration’s request for $12.6 million in tax anticipation notes (TANs) in order to meet a cash flow crisis. The Finance Committee meeting will start at 5:30 p.m. followed by a special session of the City Council scheduled for 6 p.m. at City Hall.
On the advice of the city’s Finance Department, Mayor Donald Grebien is asking the City Council to approve the purchase of a $12.6 million TAN in the first week of February that would be paid in July of 2012 (which is fiscal year 2013). The interest on the TAN is estimated at 3 percent in the amount of $170,000.
Because the payment due date would extend into the first quarter of fiscal year 2013, this request also needs approval by the General Assembly. The House and Senate Finance Committees have scheduled simultaneous hearings on Tuesday at 3 p.m. at the State House to discuss two bills that would authorize the city to issue the TANs payable in FY13.
Mayor Donald Grebien recently enacted a spending freeze in light of a projected $2.3 million deficit in the current fiscal year budget. Yet, he and the city’s financial officials said the cash flow problem is different in that money is needed sooner rather than later to meet the city’s payroll and to pay the bills and operating expenses.
Due primarily to a loss in state aid, this would be the third time in a row that the city has needed a TAN to help it stay afloat. According to the city’s Finance Department, in light of the elimination of $4.6 million in general state aid in the state budget for FY10, the city purchased a $5.5 million TAN with the Bank of America on April 14, 2010 and paid it back on June 30, 2010, which is the end of the city’s fiscal year.
In fiscal year 2011, state aid was again reduced by $4.6 million. In addition, city finance officials cite a $2.1 million shortfall that occurred when the state revised its auto exemption. They say the exemption of $500 should have equated to $2.8 million in revenue to Pawtucket. However, the state only reimburses the city for approximately $700,000.
Another factor in FY11 was the City Council’s decision to reduce the auto exemption from $6,000 to $3,400, rather than the $500 amount it could have been lowered to. This resulted in a loss of $5.6 million in revenue.
To deal with this shortfall, the city purchased a TAN for $11.6 million from the Bank of America in April of 2011 and paid it back on July 28 of 2011. The City Council and General Assembly approved the payment of the TAN in FY12, the succeeding fiscal year.
In FY12, financial officials say it is more of the same, with the continued elimination of $4.6 million in state aid and the continuation of the $2.1 million shortfall that comes from the auto exemption. Again, they pointed out that while the $500 exemption equates to $2.8 million in revenue due the city, only $700,000 in state aid is received back for that purpose.
Grebien said on Friday that back in late October, former Finance Director Ronald Wunschel had notified him, the City Council, the state Department of Revenue and other pertinent parties of the potential need for a TAN of $11.5 million to meet the city’s cash flow needs. By December 1, Wunschel provided the mayor and council with a
new cash flow analysis, increasing the TAN requirement to $12.5 million and moving up the issuance date from March to early February. The city’s Finance Department had met with Bank of America officials in December and officials were expecting the bank to service their needs.
However, around January 10, city officials were informed that Bank of America had decided not to entertain TANS for any cities and towns in Rhode Island. This news and the fact that the sale of a TAN could become more complicated and costly due to possibly becoming a bid process pushed up the need to secure City Council and General Assembly approval, Grebien said.
Grebien told the Times that the losses of state aid and local revenue over the past three years reflect a cumulative loss of revenue of $23.6 million.
He also noted that the city utilized special revenue fund balances totaling $1.5 million and another $3.4 million in medical reserves to eliminate the FY 11 deficit.
The mayor further noted that since taking office, he has frozen expenses and cut staff, saving $1.4 million by reducing salaries and benefits through attrition and consolidation of some positions in FY11 and another $1.6 million from reducing salaries and benefits in FY12. He also said he continues to work to reduce public safety overtime costs, particularly in the Fire Department, which is now about $700,000 over budget.
Grebien said that if these steps had not been taken, deficits would not have been able to be reduced or eliminated, the structural deficit would be higher and the city’s cash flow needs would be much worse than they are today.
Grebien, referring to similar assessments from new city Finance Director Joanna L’Heureux and Wunschel, noted that with the current economic recession resulting in foreclosures and a reduction in state aid to local communities, the city has experienced a debilitating reduction in available revenue. As such, he said the city can expect to have a need for TANs going forward for a number of years.
Grebien and his financial team said, however, that with continued monitoring of expenses and cuts as well as potential moderate tax increases, both the structural deficit and the TAN amount needed will eventually decrease.
Grebien said that among the key measures of a five-year deficit reduction plan is achieving savings through new collective bargaining agreements. He said he is looking for a total of approximately $10 million in concessions from the municipal unions.
He said he has also asked for efficiency studies and will be looking at ways of possibly consolidating or privatizing some city operations, including the trash transfer station and waste collection, to cut costs and generate more revenue.

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