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Fitch sinks city's bond rating

March 8, 2012

WOONSOCKET — Citing surging deficits driven by deficient financial controls in the School Department, Fitch Ratings knocked down the city’s bond rating four notches Wednesday from BBB- to BB-.
The move puts the city’s $117 million portfolio of general obligation bonds in junk territory on the Fitch scale for the first time. The old rating was Fitch’s lowest investment grade.
“Unfortunately, it’s not something we didn’t expect,” said Mayor Leo T. Fontaine. “Clearly the pressure from the school department’s $10 million deficit was the last straw for Fitch.”
Fitch Ratings and its sister agency, Moody’s Investor Service, now concur that the city’s bond rating is below investment grade, or what investors call junk status.
Moody’s had already ranked the city for some time at Ba2, or two notches below investment grade, but the agency is expected to reevaluate the standing in a few days following this week’s revelations about the severity of the city’s fiscal crisis.
“Whether or not they’re going to change the rating, we don’t know,” said Finance Director Thomas M. Bruce III.
In a report issued Wednesday, Fitch also said it placed the city on a negative ratings watch, citing “concerns over Woonsocket’s ability to successfully, and in a timely manner, address the school’s cash flow issues and longer-term financial operations.” Officials said earlier this week the city could run out of cash by the end of the month, an event that could push it into receivership or force it to relinquish some financial control to the state.
Fitch said a key rating driver was the size of the school department’s deficit, which is about 7.6 percent of all city spending.
“It is Fitch’s opinion that the city has very limited expenditure options available to address the imbalance, and the tax base is stressed,” the report says.
Though Fitch says the possibility of state oversight would be a positive development, “the level of the state’s concern is an indication of the severity of the city’s fiscal problems.”
The report says the new deficits are particularly concerning because the city borrowed $11.5 million last March to wipe out earlier deficits.
Based on discussions Fitch had with city officials earlier this week, Fitch says the city now anticipates school cash fund shortfalls ranging from $1 to 1.5 million per month for the rest of the fiscal year.
To address the city’s cash flow problems, one of its alternatives is to issue a supplemental tax bill to raise $4 million, according to Fitch. Bruce said the figure is not cast in stone but it means the city would have to issue a supplemental tax bill equivalent to about 10 percent of the existing tax rate, or about $2.50 per thousand dollars, before the end of the fiscal year.
Fitch said the city has also suggest reaping another $1.8 million worth of wage reductions from employees, but the agency is skeptical of the assessment, saying “the wage reductions may be subject to challenge from the unions.”
The prospect of a supplemental tax bill would also allow the city to borrow more than $3 million in anticipation of taxes, a short-term loan that is likely to be very costly in view of the rating nosedive. Indeed, the most tangible effect of the ratings adjustment will be make long-term borrowing prohibitively expensive, which narrows the options available for the city to climb out of the hole, and cause the process to take longer, according to the mayor.
Meanwhile, the School Committee is scrambling to come up with a long-term “corrective action plan” to bring spending into line with available expenditures. The plan will be unveiled at 4:30 p.m. Monday during a meeting at the Hamlet Middle School.
Dr. Giovanna Donoyan, the superintendent of schools, declined to say what’s in store for the public school system, but it won’t be pretty.
“I think we’re at absurd levels at this point,” she said. “I can tell you this, whatever cuts will be made will be some of the hardest that have ever impacted this community.”
If there's one person who’s taking heat for causing the fiscal meltdown, it’s Business Manager Stacey Busby, who is on leave from her job. She was lambasted by City Council members Monday amid accusations of lying to the School Committee to cover up a cash shortfall, forecasting a surplus until the eleventh hour.
As of yesterday, Donoyan would not say whether there has been any change in Busby’s paid-leave status, despite strident calls for her termination from the City Council. But sources on the School Committee say Busby’s employment status will be the subject of a closed-door personnel hearing next Wednesday.
Fontaine said he’s also asked lawyer Joe Larisa for an opinion on whether Busby’s $90,000 a year contract, which still has more than a year left on it, is valid. A clause allowing Busby to be fired for cause mysteriously vanished from the three-year pact when it was drawn up following her first year on the job.
School Committee legal counsel Richard Ackerman says he never saw the contract before it was signed by former Schools Supt. Robert Gerardi and former School Committee Chairman Marc Dubois, now a member of the City Council. Dubois says he didn’t realize the termination clause had been deleted from the agreement.
Busby did not return phone calls yesterday.

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