Moody's Drops Woonsocket's Bond Rating, May Lower it Further

Moody's investors rating agency downgraded Woonsocket's general obligation, unlimited tax rating to B3 from B2 Monday afternoon, and may drop it further yet, said City Finance Director Thomas Bruce.

Though Woonsocket's financial reputation has taken hits before, another rating dip would mark a new realm of financial malaise for the city. The next lowest rating would put the Woonsocket at the C - level — nearer to that applied to bankrupt municipalities, Bruce said.

With the Budget Commission's 5-year-plan still waiting on union negotiations and the supplemental tax, and the city's $4.8 million debt service payment (on $214.3 million of outstanding debt) due July 15, "That represents no substantial improvement," over last year, Bruce said.

Contrary to popular belief, Moody's considers the state-appointed Woonsocket Budget Commission among the city's financial strengths, due to its ability to advance state aid. Among the city's weaknesses are the near-term cash flow problem making that advance necessary, a "very high debt burden" and unfunded pension liability, and high and increasing fixed costs, according to Moody's report.

Woonsocket's pension plan is critically under-funded at 56.7 percent ($58 million of a $98 million total obligation) as of July 1, 2012, under the 60 percent threshold set by the state. Also, the city's Other Post-Employment Benefits (OPEB) - or health care obligation - stands at $210 million, which the city has essentially failed to fund.

Then, there is the matter of recent school budgets. "The city's school fund has consistently run operating deficits, draining the city's operating funds of reserves and severely constraining cash flow, despite the issuance of deficit funding bonds in fiscal 2011 and the appointment by the state of a budget commission last year to provide financial oversight. This represents the second consecutive year the city will require state aid advances to avoid defaulting on near-term debt service payments, indicating systemic and ongoing challenges to financial balance," according to Moody's assessment.

Bruce said the Budget Commission's decision to add $4.4 million to the school department budget with no revenue to back it up also played a role in the assessment of the city's finances. Bruce said Moody's is asking where that money is coming from, "And the answer is it's not there," he said, "We have lived with that all year and now we're paying for it."

Bruce said he, RI Director of Revenue Rosemary Booth Gallogly and representatives from Moody's will meet Wednesday to discuss not only how to solve the city's current cash flow problem, but how to keep the city from future cash flow crises.

Whether the city's rating drops again depends on:

• Whether cash flow can be improved with less reliance on state aid advances.
• A multi-year reduction of the school fund deficit
• Progress toward fixing the unfunded pension liability

"The review for downgrade will consider the city's development and execution of a plan to make its $4.8 million debt service payment due July 15, in light of its severely-strained liquidity position. The review will also consider the likelihood of implementation of a balanced budget for 2014 and a five-year deficit reduction plan, which will require successful resolution of ongoing union negotiations to achieve material reductions in active and retiree health and pension benefits. Finally, the review will consider the likelihood of the appointment of a receiver, which could be a precursor to a Chapter 9 bankruptcy filing," according to Moody's report.

Bruce said that progress on the 5-year plan, particularly in union negotiations and movement of one of the Senate or House supplemental tax bills, which have lingered on their chambers' respective desks since passing pending the sponsors' word, would markedly improve the city's financial position, and could've prevented the current rating downgrade.