PAWTUCKET—Casting a Grinch-like mood over City Hall, Fitch Ratings announced Wednesday that is has downgraded Pawtucket's general obligation bonds by two notches and has removed the city's rating from a “watch” status to a “negative rating outlook.”
The downgrade to “BBB-” from “BBB+” affects three categories of general obligation bonds: $6.38 million, series 2001; $3.46 million refunding bonds, series 2002B; and $11.05 million, series 2005. The new bond rate is just one notch away from “junk bond status.”
According to a press release from Fitch Ratings, the two-notch downgrade is a result of the city's “extremely limited financial flexibility compounded by significant combined city and school fund deficits forecasted for fiscal 2011.”
The “negative rating outlook” reflects Fitch's concern about “the viability of potential budgetary solutions including a proposed deficit financing which requires the state's approval of a plan to eliminate cumulative deficits, and the city's ability to obtain market access for cash flow notes,” according to the press release.
Other reasons for the downgrade include the fact that the city's taxpayer concentration is low, wealth indicators are below average and the city's unemployment rate exceeds state and national averages.
On the upside, Fitch Ratings also stated that it considers the state's involvement with the city to formulate a plan to eliminate its cumulative deficits “a positive credit factor,” and that its debt levels are low. Additionally, it was noted that while the city's unfunded pension and other post-employment benefit (OPEB) liabilities are high, the city has made progress in meeting its pension annual required contributions (ARC).
However, Fitch Ratings warned that a further downgrade (to junk bond status) could possibly be triggered by two factors: failure to obtain the required approval from the state for the issuance of deficit financing bonds or the development of an alternative solution to eliminate its projected cumulative deficits; and inability to obtain market access for issuance of either tax anticipation notes (TANS) to facilitate cash flow needs or the proposed deficit bonds.
In his credit summary, Kevin Dolan, Fitch Ratings primary analyst, wrote that the city has seen a significant decline in its reserves for three of the last fiscal years due primarily to cuts in state aid, and that future budget balancing “appears even more challenging.” He noted that for the city's fiscal 2011 budget, the property tax rate was increased by 0.4 percent and included $9.8 million in motor vehicle excise tax reimbursements from the state, but the state later removed the bulk of this reimbursement.
Dolan further stated that to make up for this loss in state aid, options included increasing property taxes up to the maximum 4.5 percent cap (or even higher by a four-fifths vote of City Council members) and/or lowering the city's exemption for the motor vehicle excise tax. He noted, however, that the City Council did not support the mayor's proposed tax levy increase to fully offset the lost revenues and, instead, approved a motor vehicle exemption of $3,400 and increased the tax levy to an amount just two cents below the maximum. While these actions generated $4 million in revenue, the budget was still $5.8 million short of the total lost aid.
Dolan wrote that while the City Council plans to continue reducing expenses, including limited union concessions, to achieve a balanced budget, Fitch believes this will be difficult given substantial labor concessions to date.
Additionally, Dolan wrote that the city's school department has also experienced continued years of deficit operations, primarily due to a loss of state aid and overspending. He noted that a spending plan to eliminate $1.2 million of the total cumulative deficit for fiscal year 2010 over the next two years has been approved and another plan to eliminate the remaining $2.3 million over five years is subject to approval by the state Auditor general.
Dolan also observed that for fiscal 2011, the school department is projecting an operating deficit of $3.9 million, of which $2.9 million is projected to be paid off from federal stimulus monies. This deficit was caused largely by an influx of 183 new students requiring the hiring of six new teachers.
Outgoing Pawtucket Mayor James E. Doyle said that while the downgrade of the city's bonds is unfortunate, it was not unexpected. “We knew we would be taking a hit, but we didn't realize it would be two notches,” he said. He added, however, that “we're still able to invest and borrow money. It's not a major situation.”
Doyle said noted that in the comments provided by Fitch Ratings, the downgrade was mostly attributed to the shortfall in the state's budget situation. “It's too bad, and I'm sorry it had to happen, but it's very reflective of what is happening in other cities and towns in the state,” said Doyle.
The mayor, who leaves office on Jan. 3, added that the city will likely have to keep this rating for the next six months, but said he hopes to see it upgraded again at some point. He said, however, that the city's financial situation is the result of a series of events that have been happening over several years, and expressed doubt that this bond rating will be corrected over a short period of time. “This would have been a difficult job for anyone sitting in the mayor's office,” Doyle said.
Doyle, who had originally presented a budget that recommended an 84 cent increase on the property tax rate which the City Council rejected, said he thinks this would have helped reduce the gravity of the budget situation. “I don't want to say 'I told you so,' but that was an honest budget we presented to them,” he said. He also noted that the City Council could have dropped the motor vehicle tax exemption down as low as $500, but chose to put it at $3,400. “That cost us another $1.5 million to $2 million in revenue,” he said, noting that “all these things add up.”
Mayor-elect Donald Grebien, who will soon inherit the city's budget problems, said he was greatly concerned when he learned about the downgrade, and thinks the current administration should have done more to reign in spending and control the city's debt.
“Clearly, this is a legacy of debt,” Grebien stated. “It's a recognition that the current administration has not been dealing with this issue.” He added that he and his transition team have put together a five-year plan designed to address the city's deficit, but noted, “We're not in there yet.”
Grebien said he also had asked the Doyle Administration to refrain from filling any vacant positions or doing any promotions, and to not make purchases until he took office. “But they hired and they promoted, and this is where the impact comes in,” said Grebien. He noted that already, among a batch of police and fire department promotions that took place just six weeks ago, one individual has put in for his retirement at the higher rank. “Just those last promotions alone cost us $17,000,” Grebien noted.
Grebien said that as he begins his administration, the Fitch assessment “is obviously not the outlook we would have wanted.” “But,” he added, “I have to go in an make some serious changes. I have to deal with this, and we will continue to work with everyone involved and make the best decisions for the city.”