Fitch Affirms Woonsocket, RI's GOs at 'B'; Outlook Negative

  Fitch Affirms Woonsocket, RI's GOs at 'B'; Outlook Negative

Business Wire

NEW YORK -- November 21, 2012

Fitch Ratings has taken the following action on City of Woonsocket RI's (the
city) outstanding general obligation (GO) bonds:

--Approximately $118 million GO bonds affirmed at 'B'

The Rating Outlook remains Negative.

SECURITY

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

KEY RATING DRIVERS

CONTINUED SCHOOL FUND DEFICIT OPERATIONS, LIQUIDITY CONCERNS: The city remains
financially stressed due to ongoing school fund deficit operations and
liquidity issues. For the near-term, liquidity issues have been addressed
through an advance of state aid that was scheduled for the final three months
of fiscal year 2013, necessitating action to address cash needs in those
months.

NEGATIVE OUTLOOK: The Negative Outlook reflects the likelihood of continued
long-term fiscal pressure as the city attempts to bring its finances back into
balance.

INTERNAL CONTROL DEFICIENCIES: Deficiencies in internal fiscal controls of the
school department, an autonomous division of the city, led to a sizable fiscal
year 2011 school fund deficit, contrary to prior reported estimates of a
positive ending balance. Similarly, the significant projected deficit for
fiscal 2012 surfaced precipitously and well into the fiscal year.

LIMITED REVENUE GENERATING FLEXIBILITY: Revenue generation is reliant
primarily on property taxes, currently at a high rate. The city council
continues to show willingness to tax at the maximum level and attempted to
implement a fiscal 2012 supplemental tax levy increase, which was not approved
by the state legislature.

WEAK EMPLOYMENT AND DEMOGRAPHICS: City demographics are weak with high
unemployment levels, low income levels, and declining population.

HIGH DEBT RATIOS AND UNDER-FUNDED PENSIONS: Debt levels are above average and
the city administered pension plan is funded at a low 57%, as of July 2012.
Combined fiscal year annual pension, OPEB, and debt service costs are high at
about 26% of general fund and school fund expenditures.

WHAT COULD TRIGGER A RATING ACTION

LIQUIDITY CONCERNS: Inability to adequately address cash flow issues could
further weaken the city's credit quality.

INADEQUATE RESPONSE TO DEFICIT: Failure to address accumulated and ongoing
operating deficits adequately and in a timely manner may lead to a rating
downgrade.

CONTINUED INTERNAL CONTROL PROBLEMS: Continued lack of solid school department
fiscal controls and lack of meaningful change in financial management could
also have a negative impact on the rating.

CREDIT PROFILE:

STATE AID ADVANCE ADDRESSES NEAR-TERM SCHOOL LIQUIDITY CONCERNS

Through May of fiscal year 2012, school cash flow needs were met by
prioritizing payments, reliance on expedited state aid payments, and city
general fund assistance. Over $6 million in vendor invoices remained
outstanding and the city was on track to run out of cash resources by early
June. Although the city council had approved a supplemental tax levy to
address school cash flow needs, it did not receive the state legislative
approval necessary for its implementation. At the end of May, the city council
voted to request state Budget Commission oversight of city and school
department finances. The state approved the request, and the Budget Commission
used its authority to advance $12 million in state aid to the city, originally
scheduled for April through June of fiscal year 2013.

Establishment of Budget Commission oversight is a positive development that
may provide the city with greater and more effective fiscal solutions. Earlier
this month, voters approved a ballot measure that aligns school department
operations closer to those of the city. The measure gives the mayor authority
to appoint school committee members, with the consent of the city council,
rather than having them elected. It also grants the city authority over school
purchasing for supplies, materials and services.

The state aid advance addressed the city's immediate cash flow needs,
including the backlog of outstanding vendor payments. However, it left the
city with the need to adjust its finances to allow for the fiscal year end's
lack of state aid. City cash flows currently indicate deficits starting in
March 2013 that grow to $6.6 million by fiscal year-end.

To address cash flow issues, the city is considering imposing a supplemental
tax levy and issuing tax anticipation notes backed by these proceeds. Fitch
views this strategy with concern given the state legislature's decision not to
approve a supplemental levy in 2012. However, management has indicated that
the smaller increase considered this year, (about 6% vs. 13% last year) and
the city's pursuit of union concessions in addition to the tax increase, may
improve the chances of the tax proposal being approved by the state
legislature.

ONGOING SIGNIFICANT CUMULATIVE BUDGET DEFICIT

Current estimates indicate a fiscal year 2012 cumulative school fund budget
deficit of about $10 million, with the total cumulative deficit (offset by a
fiscal year 2012 positive general fund balance) of about $8 million. The
deficit could grow by at least another $5 million in fiscal year 2013, absent
cost containment and/or revenue generating measures.

To address the deficit, the city is looking to cut expenditures, including
lowering health and pension costs and is currently involved in negotiations
with labor unions. Estimated multi-year health care savings total about $3.2
million, with $1.5 million estimated for fiscal year 2013. The city is also
seeking cost reductions through consolidation of departmental operations. In
addition, the city is considering a supplemental tax levy that would generate
$2 to $3 million. The city is hoping that measures in fiscal year 2013 will
avoid the increase to the cumulative deficit, although the existing deficit
will be addressed over the next three to five years.

FINANCIAL OPERATIONS PLAGUED BY SCHOOL FUND DEFICITS

Following significant cuts in state aid and a weak economy, Woonsocket has
been hurt over the last three years by overspending by school department
officials. It appeared that the city was on track towards financial stability
when it issued $11.5 million in deficit financing bonds in March of 2011. The
city was projecting a small surplus in its general fund and school officials
were projecting balanced operations for fiscal year 2011.

While the general fund ended fiscal year 2011 positively with an unrestricted
fund balance (the sum of the unassigned, assigned, and committed fund balances
under GASB 54) of $2.4 million or about 3.1% of general fund spending, the
unrestricted school fund balance was a negative $3 million (4.6% of school
fund spending. The deficit was related largely to personnel spending without
corresponding resources to cover the expenditures, according to city
management.

In December 2011, city officials reported that revenues were not going to be
sufficient to meet the school fund's fiscal 2012 budget. An accurate estimate
was not available at the time due to poor internal reporting practices. City
and school officials worked to compile accurate current year cash flow and
expenditure information for the school fund and in March 2012 presented budget
figures indicating an estimated $7.3 million school fund deficit for the
fiscal year 2012.

LONGER-TERM FINANCIAL CHALLENGES

The city faces a significant structural budget imbalance and will face
significant challenges in bringing its spending in line with revenues. Fitch
remains concerned about the ability of the city and school department to
implement changes that will meaningfully improve financial stability given
that prior efforts have not always yielded intended results. However, Budget
Commission oversight and recent closer integration of city and school
operations are positive developments that may lead to more effective fiscal
management.

The city's revenue raising flexibility is limited due to statewide annual
limits on property tax levies. The city was able to exceed the statewide
property tax levy cap limit in fiscal year 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 worked
its unions to reduce labor costs.

WEAK SOCIOECONOMIC INDICATORS

Woonsocket, located 15 miles outside of Providence, has a 2011 population of
41,188 and a tax base of about $1.8 billion. The city benefits from the
presence of CVS Caremark Corporation, which maintains its headquarters in the
city and is the city's largest employer with about 5,780 workers. Median
household income of $38,625 and per capita money income of $20,242 are below
average at 70% and 71% of state averages, respectively.

The city's unemployment rate continues to be elevated at 12.2% for August
2012, as compared to 10.6% for the state and 8.2% for the nation. Between 2000
and 2011, the city's population declined by about 5%, while the state's
increased by less than 1% and the nation's grew by about 11%.

HIGH DEBT RATIOS AND UNDER-FUNDED PENSIONS

Overall debt levels are high at $3,265 per capita and 7.6% of market value.
These levels are net of state debt service reimbursements on the city's public
school revenue bonds issued by the Rhode Island Health and Education Building
Corporation and include the city's 2002 GO pension bonds.

The city administered pension plan is funded at a low 57%, assuming a 7.5%
rate of return, with an unfunded liability of $43 million at July 1, 2012.
This represents a decline from the 2011 funded level of about 61%. The 2012
funded ratio declines even further to 54% using a Fitch-adjusted 7% rate of
return. The city has been funding only a fraction of the actuarially required
contribution (ARC) for the city administered pension plan. Funding in fiscal
2013 was a weak 28% of the ARC but an improvement over the less than 1% funded
in fiscal year 2011.

The city's and school department's OPEB liabilities as of July 1, 2011 were
equal to a high $127 million and $47 million, respectively; both amounts
include assumptions of a 4% investment rate of return. Total pension, OPEB,
and debt service payments as a percentage of fiscal 2011 spending were high at
about 42% of general fund spending or about 26% of general and school fund
spending.

Additional information is available at 'www.fitchratings.com'. Please review
and approve the attached edits. Please make ANY additional edits to the
attached draft. If there are no additional changes please submit for business
approval.

In addition to the sources of information identified in Fitch's 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, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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