WOONSOCKET – The city moved a step deeper into fiscal crisis this week as Fitch Ratings placed the city’s $118 million portfolio of general obligation bonds on negative watch status.
Finance Director Tom Bruce said the status shift almost certainly means that Fitch will downgrade the city’s bond rating and that Moody’s Investor Service will likely follow suit.
At this point, Bruce said it’s probably inevitable that the state will call for increased oversight of the city’s fiscal affairs – the only question is how much.
“A bond rating downgrade makes it more likely we’ll have state oversight,” said Bruce. “If there is an upside to this it’s that to the extent the state comes in to help us or intervenes, the rating agencies would view that as a positive thing.”
The event driving the latest brush with fiscal meltdown was the recent discovery of a projected $2.7 million deficit in the School Department’s 2011 budget by the city’s auditing firm, Braver PC. The news blindsided city officials because, they say, just weeks before Braver found the revenue chasm, School Department Business Manager Stacey Busby was projecting a surplus.
Now Bruce says the rating agencies are waiting for Braver PC to confirm its findings in a final audit before they make their next move. That final report is due in about a week.
Fitch currently pegs the city’s bond rating at BBB-, Moody’s, Ba1. The former is Fitch’s lowest investment grade, a notch above junk, while the latter is the topmost junk level on the Moody’s barometer.
Bruce says the most daunting short-term challenge for the city may be to stay above the “C” class of ratings. A “C” grade is generally viewed as a bellwether of municipal default, and would probably prevent the city from obtaining any kind of bank loan.
How the rating agencies respond may also depend on what state Revenue Director Rosemary Booth Gallogly discovers as a result of an ongoing probe of the current school year’s finances, and what she does about it, Bruce says. Gallogly has instructed school officials to turn over detailed payroll records to determine whether deficit spending continues in the current fiscal year, and to what extent.
Gallogly could appoint a state overseer to help manage, and keep tabs on, the city’s finances – the least intense level of state intervention, Bruce said.
There are two more aggressive options at Gallogly’s disposal, including the appointment of a budget commission. That’s what happened in East Providence last week.
Unlike an overseer, a budget commission has broad powers to take actions that taxpayers would feel directly in their pocketbooks, including the resetting of tax rates.
Then, says Bruce, there’s receivership, which is basically a court-supervised takeover of all local financial decisions, aimed at restoring the city to solvency. As the experience of Central Falls has shown, a court-appointed receiver would have the power to raise taxes, void labor contracts and roll back pensions to balance budgets, and elected political leaders would be powerless to stop it.
Bruce says it’s too soon to predict what will happen. It seems logical that the state would opt for the least intense level of intervention before taking more drastic action, but that may not be how the situation plays out.
“There’s no rulebook,” says Bruce. “For the city and the state, this is uncharted territory.”
But Bruce says the city may be able to stave off a disaster if it can convince the rating agencies that it has a solid plan to shore up the school department’s finances.
The underlying issue is fiduciary accountability, he said. That core component of creditworthiness took a beating when Braver unearthed the $2.7 million deficit, because the school department was already under a court order to live within its means.
The school department was also under a balanced-budget mandate laid down by the state for permitting the city to borrow $12 million to erase prior red ink, most of it on school ledgers.
Even in a best-case scenario, the erosion of the bond rating will make it harder for the city to obtain short-term loans, increasing the likelihood of a future cash crunch.
A taste of what’s in store may have already arrived in the latest payroll on tap for employees of the school department. The state was forced to make an emergency transfer of funds three days early on Thursday because the school department did not have $1.7 million in the bank to draw checks on. The city advised the department several days ago that its $13 million allotment from the city is exhausted, so those funds were not available.