OREANDA-NEWS. Fitch Ratings has upgraded the city of Woonsocket RI's (the city) Issuer Default Rating (IDR) to 'BB+' from 'BB-'. In addition, the rating on the city's outstanding series 2002 and 2005 general obligation (GO) bonds has been upgraded to 'BBB' from 'BB-'. The GO bond rating at two notches above the city's IDR reflects the enhanced recovery prospects for GO bondholders afforded by a statutory lien on pledged property tax revenues. Fitch's revised criteria for U. S. state and local government credits, which was released on April 18, 2016, give rating credit up to two notches above the IDR in limited circumstances in which Fitch believes there are distinct and significantly superior prospects for ultimate recovery in the event of a municipal bankruptcy.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city and are backed by its full faith and credit and unlimited taxing power.

The Rhode Island State General Assembly enacted amendments to Section 45-12-1 of the General Laws to provide GO bondholders with a statutory lien on ad valorem taxes and general fund revenues of cities and towns with priority over creditors in the event of a bankruptcy of the issuer.

KEY RATING DRIVERS

ISSUER DEFAULT RATING UPGRADE: The city's IDR has been upgraded to 'BB+' from 'BB-'. The upgrade reflects city finances that have benefited from stabilization of general fund and school fund operations and improved budget management. Management's actions in recent years, under state guidance (formerly via a budget commission and currently via a state fiscal advisor) have resulted in improved fiscal oversight, stronger reserve levels and financial flexibility.

The IDR of 'BB+' reflects an improved but still challenged fiscal position, expectations of slow base revenue growth, with good revenue-raising ability, natural spending growth in excess of revenue growth and limited expenditure flexibility. Carrying costs related to long-term liabilities are expected to remain elevated. The long-term debt and pension liability burden is moderate (about 16.5% of personal income), with an additional sizable OPEB liability.

Economic Resource Base

Woonsocket is located 13 miles outside of the capital city of Providence. The city benefits from the presence of CVS Health, which is headquartered in the city and is the largest employer and taxpayer. Income and wealth indicators are below average. Unemployment has decreased, but remains above state and national levels.

Revenue Framework: 'aa' factor assessment

The city's 10-year (through fiscal 2014) general fund revenue growth rate was higher than the national inflation rate and just above national GDP growth. Base revenue growth is expected to be slow, but supported by good independent ability to raise revenues as needed.

Expenditure Framework: 'bbb' factor assessment

The assessment reflects the expectation of natural spending growth in excess of revenue growth and limited expenditure flexibility. Carrying costs related to long-term liabilities (about 24% of fiscal 2015 governmental spending) are expected to remain elevated. Management control over headcount, wages, benefits, and work rules is limited by staffing and labor contract requirements. Overall spending will likely be pressured by the need to address pension and OPEB liabilities, as well as deferred general spending needs as the city enters a more stable financial period following recent significant fiscal weakening.

Long-Term Liability Burden: 'a' factor assessment

The city's total long-term debt and pension liability burden is moderate at about 16.5% of personal income and should remain so given modest additional debt currently contemplated. The assessment reflects the city's significant OPEB liability of about 10% of personal income.

Operating Performance: 'bb' factor assessment

The assessment reflects a history of significantly strained fiscal operations, featuring spending deferrals, use of nonrecurring sources including debt issuance to support operations, and general fund and school fund ending balances that have only just returned to a positive position on a combined basis. With the assistance of a state-appointed budget commission, the city implemented a financial improvement plan that has stabilized the city's fiscal condition. However, operating performance has been, and would likely again be challenged in a potential economic downturn.

RATING SENSITIVITIES

CONTINUED IMPROVEMENT IN FINANCES: An ongoing trend of financial improvement, including balanced combined general and school fund operations with continued full funding of required pension contributions, improved ending balances, and a stable liquidity position could lead to an improvement in the rating.

CREDIT PROFILE

Woonsocket benefits from the presence of CVS Health's headquarters. CVS is the largest employer and the largest taxpayer (about 6% of taxable assessed value [TAV]). Other top taxpayers include healthcare and retail facilities, a utility, and residential complexes. City income and wealth indicators are below average. The city's unemployment rate has been decreasing (6.6% in April 2016 vs. 7.9% a year prior) but remains higher than comparable state (4.9%) and national (4.7%) levels.

The city saw a major TAV decline for fiscal 2013 related to its three-year revaluation, followed by growth of about 4% in fiscal 2014 due primarily to lower exemptions. TAV grew by about 1% annually for fiscal years 2015 and 2016 (a revaluation year). Projections for fiscal 2017 indicate some continued base growth, but strong TAV growth (about 6%) due to a reduction in exemptions.

Revenue Framework

Property taxes represent about 80% of fiscal 2015 general fund revenues. State and federal revenues provided to the city (exclusive of school aid) made up about 10% of revenues. Remaining revenues consist largely of fines, forfeitures, charges for services (about 5%) and payments in lieu of taxes (4%).

Revenues have grown in recent years, reflecting modest tax base growth, but also tax rate increases and tax exemption changes. Fitch expects the city base revenue growth to be slow, benefitting from a recent trend of tax base stabilization. The city has seen recent commercial and residential expansions and additional development projects are in planning stages, including a proposed commuter rail line connecting Woonsocket with Worcester, MA and Providence.

Property tax levy increases, other than those related to debt service, are limited by state statute to a 4% increase above the prior year's levy. Certain exceptions to the cap are permitted, but require a 4/5ths approval from the city's council, and state approvals.

Fiscal 2016 general fund revenues are projected to increase by about 2.8%. Growth reflects increased property taxes (including PILOT payments) due to tax base growth and increased prior year collections.

On a budget-to-budget basis, fiscal 2017 general fund revenues decline modestly (0.9%) vs. fiscal 2016, reflecting a decrease in property tax collections, including PILOTs (0.8%), and lower state aid, with growth in other revenues. Property tax collections were affected by a reduction in tax rates for fiscal 2017, the impact of which was lessened by tax base growth and reduced exemptions.

Expenditure Framework

The city's largest general fund expenditure areas are public safety, debt service, and school support, each representing over 20% of fiscal 2015 general fund expenditures and transfers out.

The city's natural pace of spending is expected to remain above revenue growth, with pension and OPEB spending pressures due to the low funded level of the city's closed pension plan for police and firefighters and a significant OPEB liability. Pension contributions have increased in recent years as the city began to fully fund required contributions to the city pension plan. The city and school department have begun to address the total OPEB liability with a modest combined $1 million (less than 1% of the liability) in payments to an OPEB trust budgeted for fiscal 2017. The city also faces pressure from general expenditure needs following a period of significant fiscal stress that may have limited spending.

Expenditure flexibility is limited. Carrying costs, including debt and pensions, are elevated at about 24% of fiscal 2015 governmental spending. City control over headcount, wages, benefits, and work rules is limited given staffing requirements and labor contract provisions, including minimum staffing limits and binding arbitration for police and firefighters. Overall flexibility may also be limited due to a recent period of significant fiscal weakening. To address this weakening, the city enacted a number of savings initiatives, and may find it more difficult to implement additional significant spending cuts, if needed.

A suit filed by a group representing police department retirees challenged certain retiree savings initiatives implemented by the city as part of its multi-year deficit reduction plan. The city had argued that these were permissible at the city's discretion under state municipal fiscal stability statutes. A superior court judge ruled on behalf of the plaintiffs, but the city filed an appeal with the state supreme court. The city currently estimates that an adverse ruling would result in a liability to the city of about $475,000 (less than 1% of fiscal 2015 general fund spending) and increased costs of about $100,000 annually. If the ruling is affirmed, it would also indicate less available expenditure flexibility for Rhode Island municipalities in fiscal distress.

Fiscal 2016 expenditures are projected to grow by about $3.3 million or 4.4% including city and state pension cost increases and health care and blight reduction reserve appropriations. On a budget-to-budget basis, fiscal 2017 expenditures decrease by about 1.2%, largely reflecting a decline in debt service costs due to maturing debt.

Long-Term Liability Burden

The city's long-term liability burden, including debt and pension obligations, is moderate at about 16.5% of personal income and should remain so given modest potential additional debt currently contemplated. The city is considering about $2.4 million in GO debt issuance in fiscal 2018 for street light upgrades, and expects that savings from the upgrades will exceed annual debt service costs. The city also has a sizable OPEB liability, totaling about 10% of personal income.

Police hired before July 1, 1980 and firefighters hired before July 1, 1985 participate in single-employer retirement plans established by city charter. General employees and police and firefighters not part of the city plan participate in the Municipal Employees Retirement System, an agent multiple-employer defined benefit system administered by the state of Rhode Island. School personnel participate in the Employees' Retirement System of the State of Rhode Island, a cost sharing multi-employer defined benefit plan. While the city has been making 100% of required contributions to the state plans, it had historically made far less than 100% of required city plan payments until fiscal 2014. Since fiscal 2014, full city pension payments have been funded, and full funding is budgeted for fiscal 2017.

As part of a multi-year fiscal improvement plan established under state budget commission oversight in 2013, the city implemented health and pension-related savings initiatives and committed to fully funding city pension payments. Even with these reforms, the city pension plan is underfunded. The city reports a fiscal 2015 net pension liability (NPL) of $59.5 million, with fiduciary assets covering 41.5% of total pension liabilities. The city has recently begun making full actuarially-based annual pension contributions, which should help address the liability.

Operating Performance

The city has a history of considerably strained fiscal operations, leading to significant budget deficits and negative ending balances. Under oversight of a state appointed budget commission, the city enacted a multi-year deficit reduction plan that has greatly improved its fiscal condition. Finances remained challenged, however, with reserves that have only just returned to a positive position, taking into account both general and school funds, and operating performance could be challenged significantly in a potential downturn.

The city's finances, negatively affected by state aid reductions, a weak economy, and school overspending, have been strained for a number of years. Fiscal operations have featured one-time solutions, including the issuance of deficit bonds and, until recently, the underfunding of required city pension plan payments. City general fund reserve levels have improved from a negative position in fiscal years 2009 and 2010, but have remained weak. Factoring in the school fund's negative reserve positions, total end-of-year balances were negative until fiscal 2014. Fiscal 2015 marks the first year in many that both the general and school funds have ended the year with positive balances.

In 2013, with the assistance of a state appointed budget commission, the city developed a multiyear plan to reduce and ultimately eliminate a total cumulative school and city fund negative balance of $7.1 million. At the end of fiscal 2012, the general fund had a $2.6 million balance (3.7% of spending) and the school fund had a deficit of $9.8 million (-14.2%). Major components of the plan involved state legislative approval and union negotiations, and included health and pension-related savings initiatives and a $2.5 million supplemental property tax bill.

The plan was initially expected to eliminate the cumulative deficit by fiscal 2017, but better than budget performance resulted in positive ending balances for both general and school funds for fiscal 2015. In March 2015 following the state's determination that the commission had met its goal of fiscal stabilization, commission oversight of the city was removed. Per state statutory requirements, the state director of revenue appointed a fiscal advisor for a period of five years until 2020.

Fiscal 2015 ended with an unrestricted general fund ending balance of about $3.9 million, or about 5.1% of general fund spending. The total school fund balance (restricted for school spending purposes) was about $2 million, or about 3% of school fund spending. Estimates for fiscal year-end 2016 indicate operating surpluses for both the general fund ($1.3 million) and school fund (about $499,000). The fiscal 2017 school fund budget is balanced and a modest surplus (about $241,000) is budgeted for the general fund. The city charter currently mandates the build-up of a general fund budget reserve, with 1% of revenues to be set aside annually until the balance reaches 8%, where it is to be maintained. The fiscal 2017 budget includes the 1% reserve set-aside.

Improved Liquidity

Recent year cash flow strain has required interfund borrowing, state aid advances, deferred vendor payments and property tax pre-payment for stabilization. In fiscal 2013, the state advanced $12.4 million in school aid to July 2012 from April through June 2013 payments. In addition, the city benefitted from a CVS Corporation prepayment in June 2013 of its $2.8 million fiscal 2014 property tax bill. The state again advanced school aid in fiscal 2014 ($12.8 million) to July from April through June payments. The city also relied on interfund borrowing ($2 million) and deferred vendor payments ($2.8 million vs. $7 million in fiscal 2013) to stabilize cash flows.

Fiscal 2015 cash flows relied on a lower state aid advance ($8.9 million) and $2 million in interfund borrowing. For fiscal 2016, the city relied on $6 million in interfund borrowing from available balances in a city utility fund, which was repaid in October 2015. The borrowing was required due to a late tax bill mailing related to final agreement on property tax rates. A cash balance of $7.2 million (about 5% of fiscal 2016 projected combined general and school fund spending) is estimated for fiscal year-end 2016. Projections for fiscal 2017 indicate no interfund borrowing necessary and estimate an ending cash balance of $6.6 million or about 5% of combined spending. Available balances for borrowing, if needed, include $6 million in a city utility fund and about $841,000 in a city capital fund.