RUSS OLIVO

WOONSOCKET — Moody's Investors Service lowered the city's bond rating before the sale of $74 million in general obligation bonds to finance the Hamlet Avenue middle school project last week.

Moody's cut the rating a notch, from Baa1 to Baa2, coupling the assessment with a negative mid-term outlook in a report issued just prior to the sale of the bonds on Nov. 12,  said Finance Director Ted Przybyla.  Moody's said the changes were the result of the continued deterioration of the city's financial strength.
Bond ratings are basically a scale used for investors to judge the creditworthiness of an organization with the authority to issue bonds. Baa2 is in the lowest tier of Moody's investment grades and just two notches above junk status.
A rule of thumb for bonds is that interest on the principle rises as the rating falls. Because the bonds were issued in a joint venture with the Rhode Island Health & Educational Building Corporation, however, they hit the market with interest rates that were still “very favorable” to the city — about 4.9 percent, said Przybyla. RIHEBC, a quasi-public organization that was formed in 1966 to help municipalities and non-profits raise funds to build schools and hospitals, has a better bond rating than the city.
“The downgrade was not a positive thing but it did not impact this bond issue,” said Przybyla. “Everything went smoothly and we got a good rate.”
The first payment of interest and principle on the 25-year note, about $1.2 million,  is due in October 2010. Under an arrangement sanctioned by the General Assembly, the state Department of Education will reimburse the city for 81 percent of the financing costs, but the city must pay the annual bills up front. Reimbursements are expected to follow within 30 days of each payment, Przybyla said.
After the bond sale, the city used the proceeds to retire $74 million in short-term bond anticipation notes, or BANS, that the city had floated to raise cash to finance construction of the two new middle schools on Hamlet Avenue. Students from the antiquated Woonsocket Middle School on Park Place middle school are to be transferred to the mirror-image, 880-student schools overlooking the Blackstone River on Jan. 4, after returning from the holiday break.
Planning Director Joel D. Mathews, the chairman of the School Building Committee, said Gov. Donald Carcieri and Education Commissioner Deborah G. Gist will be on hand when the public is invited to tour the schools for the first time on Saturday.
Though the RIHEBC's A2 bond rating propped up the city's slack financials  for the bond issue, Przybyla said the downgrading of the city's rating, though not unexpected, was nevertheless troubling news. Moody's, which had affirmed the city's prior rating as recently as November 2007, blamed the poor report card on “the city's narrowed financial position following a trend of multi-year operating deficits, projected deficits in 2009” and “increased reliance on cash flow borrowing to address liquidity needs.”
The rating also takes into account the “below average wealth levels” of the city's residents and its comparatively high per-capita debt burden. The median family income of $38,353 represents just 72 percent of the statewide average and the city, with just over 43,000 inhabitants, has a cumulative debt of about $119 million.
“Moody's expects that Woonsocket's deteriorating general fund operations will remain challenged over the medium-term and that the projected $2 million in accumulated deficit at the end of fiscal 2009 and projected deficits in 2010 related to the General and School Unrestricted Funds will be addressed through a combination of a supplemental tax bill, pending approval by the General Assembly in January 2010, with the remaining portion of deficit fund balance to be addressed through a multi-year deficit reduction plan,” the rating agency's report said.
Since fiscal year 2006, the report said, the city's operating fund balance has shrunk by “a sizable 65 percent,” or about $3 million, due to overexpenditures. Budget pressures continued into fiscal 2009, when the city and the School Department started out $1.2 million and $3.2 million in the hole, respectively. During the same period, the city absorbed a mid-year cut of $1.7 million in state aid, Moody's said.
Despite the imposition of employee furlough days and other belt-tightening moves, the city now projects ending fiscal 2009 with “a narrow $1.4 million” general fund balance, and a $3.6 million deficit in the School Department.
Moody's said the fiscal 2010 budget, which began July 1, was level-funded with a 4.75 percent increase in the tax levy, the maximum allowed by law. This budget absorbs another $3.2 million cut in state aid, with a possible additional loss of $1.3 million in motor vehicle excise taxes in the fourth quarter. The state normally collects those funds and distributes them to cities and towns, but Gov. Carcieri has proposed withholding them as the state grapples with its own  budget crisis.
Though the School Department claims to have wiped out its projected deficit for the end of the current fiscal year, Moody's apparently did not get the message when it compiled this report. Based on year-to-date performance, Moody's said, the school department is forecasting an operating deficit of some $3.6 million, raising the specter of an accumulated $7.2 million shortfall by the end of the fiscal cycle, prompting more short-term borrowing by the city to make ends meet.
If the city wants to improve its bond rating, Moody's said the city must restore “structurally balanced operations” to municipal and school budgets. Also, the investor service said the “implementation of a measured approach to eliminating the accumulated deficit on operating funds will be important factors for maintenance of the current rating going forward.”