OREANDA-NEWS. Fitch Ratings has affirmed its ratings on the following City of Pawtucket, Rhode Island (the city) outstanding general obligation (GO) bonds:

--$2.9 million GO bonds, series 2005 at 'BBB+'.

The Rating Outlook is Stable.

SECURITY
The bonds are an unlimited tax general obligation of the city backed by its full faith and credit.

KEY RATING DRIVERS

SOUND FINANCIAL POSITION: Management has achieved financial stability in its general and school funds after experiencing operating pressures during the fiscal period of 2008-2011. Management eliminated its accumulated school fund deficit balances two years ahead of original expectations and has rebuilt reserves in its general fund to more solid levels.

LARGE UNFUNDED POST-EMPLOYMENT BENEFIT LIABILITIES: The city's unfunded pension and other post-employment benefit (OPEB) liabilities are very high and costs are growing. The city has been making its full pension annual required contributions (ARC) after a period of underfunding. Recently approved pension reforms have helped control growth in the ARC.

LOW DEBT LEVELS: The city's debt levels are expected to remain low even with future planned debt issuances.

BELOW-AVERAGE SOCIO ECONOMIC INDICATORS: Wealth levels are relatively low, and the city's unemployment rate exceeds state and national averages.

RATING SENSITIVITIES

PRUDENT FINANCIAL MANAGEMENT: The rating is sensitive to shifts in fundamental credit characteristics including the city's ability to manage increasing retiree benefit costs while maintaining adequate reserve levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.

CREDIT PROFILE

The city, with a stable population of 71,172, is located just north of the capital city of Providence and 40 miles from Boston.

POSITIVE FISCAL 2014 RESULTS IMPROVE LIQUIDITY

The city's fiscal 2014 results reflect a $4.8 million general fund surplus representing a third year of operational surpluses. This surplus is net of a $511,000 unbudgeted transfer to the school fund to help eliminate the school fund accumulated deficit. The fiscal 2014 general fund budget of $110.7 million was 1.4% higher than the prior year and included a planned $399,019 surplus and no tax increase.

Revenues exceeded budget by $2.5 million as current and overdue tax collections once again exceeded expectations. Expenses were also under budget due to a combination of a lag in filling open positions, proceeds from a SAFER grant offsetting fire pension costs, and savings in unemployment insurance. Unrestricted general fund balance increased to a sound 13.4% of spending. This restoration of reserves by management to more sound levels follows a four year period from fiscal 2008 through 2011 when unrestricted reserves were between 1% and 3% of spending.

SCHOOL FUND RESULTS HELP ELIMINATE ACCUMULATED DEFICITS

The original school fund structural deficit at the beginning of fiscal 2012 stood at $9 million due primarily to decreases in city and federal funding. Management prudently reduced staffing by 22 positions, froze salaries for both fiscal 2012 and 2013, and continued reducing expenditures to help partially offset the imbalance. Through a combination of improved school fund performance and general fund contributions the accumulated school fund deficit was reduced to $1.5 million at the end of fiscal 2013.

For fiscal 2014, the school fund reported a $536,000 operating surplus before transfers-in of just over $1 million from the city general fund. The city prudently accelerated its annual deficit reduction plan payments, originally scheduled to be made through fiscal 2016, eliminating the school fund's entire accumulated deficit at fiscal end 2014. The school fund closed fiscal 2014 with an unrestricted fund balance of $25,475.

Fitch expects management will continue its prudent management of city and school finances in the long term now that liquidity and budget stability have been restored. In addition, the phase-in of increased state funding for schools and other cost savings measures should continue to help stabilize school operations.

HIGH EMPLOYEE BENEFIT COSTS

The city-run pension plan for fire and police employees hired after fiscal 1974 has an unfunded liability of $142 million as of July 1, 2014, or 3.9% of fiscal 2016 taxable value. This is an improvement from the $161 million liability reported in the 2013 valuation primarily because of changes in police and fire pension benefits and higher employee contribution rates negotiated by management. Fitch estimates the plan to be poorly funded at 39% using a 7% discount rate, due primarily to historical funding below actuarially required levels.

The city increased its contributions to meet 100% of the annual required contribution (ARC) beginning in fiscal 2013 and has continued full funding through fiscal 2016. Total pension contributions of $12.4 million in fiscal 2014 were 5.8% of total governmental spending which includes the school fund. When compared solely to general fund spending the costs represented a high 11.4% of general fund spending. Pension payments for fiscal 2015 rose to $13 million and are budgeted at $13.6 million (up 4.6%) for fiscal 2016. The city's annual payments for its pre-fiscal 1974 police and fire pension plan are minimal.

The city's general and municipal employees participate in the state administered Municipal Employees' Retirement System. The city paid $2.8 million in fiscal 2014. The city's funded ratio was estimated by Fitch at 73% as of June 30, 2014 using a 7% rate of return. Teachers participate in the state's plan and the city contributed $6.9 million toward this plan in fiscal 2014. Fitch considers the state teachers' plan to be weakly funded at an estimated 57% at June 30, 2014 using Fitch's 7% rate of return assumption.

The city makes pay-as-you-go payments for its other post-employment benefits (OPEB) obligations. The most recent valuation as of July 1, 2013, shows a large unfunded liability of $310 million (a high 8.6% of market value). The city and school department contributed a combined $13 million or 73% of the OPEB ARC during fiscal 2013.

SURPLUSES PROJECTED FOR FISCAL 2015

The combined $219 million city and school fund budget for fiscal 2015 was up 2.66% or $5.7 million. The largest increase is for school expenditures. Taxes were kept level for the third year in a row. A small surplus of $200,000 was built into the general fund budget.

City officials are projecting a general fund net operating surplus of $1.3 million (1.2% of general fund budget). The positive results reflect improved motor vehicle tax collections and lower debt service costs due to refunding savings and deferred spending on a proposed lease. The city also had included $511,000 for the schools deficit elimination, but this was not needed as the deficit was fully eliminated in fiscal 2014.

The school department is projecting an unaudited surplus of $2.7 million (2.5% of budget) due primarily to lower than anticipated medical claims. School officials plan to set aside $1.8 million of the surplus as a medical reserve for future claims and designate $500,000 for capital.

FISCAL 2016 BUDGET INCLUDES TAX LEVY INCREASE

The combined city and school fund budget of $228 million is up 4% and includes a $3.2 million (+3.2%) tax levy increase and no appropriation of reserves. Expenditure increases were centered on employee salary and benefit costs. Management reports that first quarter results are in line with the budget.

DEBT LEVELS REMAIN LOW

The city's debt levels are low with overall debt to market value at 1.8% and debt per capita at $901. GO debt amortization is above-average with 68% of par retired in 10 years.

The city issued $7.2 million in bond anticipation notes in June of this year that mature June 2016. The city has received voter approval to bond for $32 million in school renovations (including redeeming a large portion of the BANs) for which the state will reimburse 82.4% of debt service and $15 million for road repairs. Fitch expects debt ratios to remain low due to the phase-in of the debt over time and the rapid amortization rate of existing debt. Debt service costs in fiscal 2014 were a low 3% of total governmental spending.

Fiscal 2014 carrying costs for debt service, pensions and OPEB paygo are a moderately high 19.5% of total governmental spending.

TAX BASE REVALUATION REFLECTS IMPROVEMENT

The city's tax base revaluation effective December 31, 2014 resulted in a 4.7% increase to $3.6 billion from the prior year and reflects growth in single and multi-family housing values. Home prices were up 3.9% year over year through September according to Zillow.com. A number of commercial expansions and restorations of formerly vacant properties which has occurred over the past few years and other projects currently in the planning process are expected by management to support future tax base growth. Fitch believes this projection is reasonable.

UNEMPLOYMENT RATES IMPROVE; WEALTH LEVELS ARE LOW

Healthcare, manufacturing and retail make up the largest components of employment. The city's major employers include Memorial Hospital (1,500 employees) and Hasbro (650), the toy manufacturer, which maintains its headquarters in the city. The city's unemployment rate was an improved 6.6% in August compared to 8.8% the prior year as employment increased by 2.87% and labor force improved by 0.47%. The state's rate was 5.7%, down from 7.5% for the same period. The city's wealth levels have historically been below state and national averages at 72% and 76%, respectively.