Moody's Sees School Deficit and Pension Costs as Real Problems for East Providence

When Moody's Investors Service announced last week that it had lowered East Providence's , it seemed to make the city's financial woes all the more real. Moody's report (attached at right) shows little faith in the city's ability to .

Moody's downgraded the city from an A1 rating to Baa1. The credit rating plays a big role in determining how banks or other lenders loan money to the city; at what interest rates they lend; or whether they lend at all.

The reports says Moody's believes East Providence "will remain challenged to restore financial stability in the near term due to budgetary pressures and increasing fixed costs related to the pension liability."

The report went on to itemize the "Strengths" and "Challenges" related to East Providence's deficit problem and credit worthiness. The strengths column listed two encouraging realities: a "sizable tax base" and a "manageable debt burden."

On the other side, the challenges are significant, ranging from the city's "limited ability to raise property tax revenue under city and state property tax caps" to an "inability to build General Fund reserves due to self-imposed policy."

Moody's report reveals that while East Providence's financial issues are extensive, they are, at least, comprehendable. The agency further justified its skepticism surrounding the city's financial outlook by citing "the growing school deficit, limited revenue raising flexibility, and increasing fixed costs." In short, the city has too many expenses and not enough revenue to satisfy them, hence a $6.3 million deficit.

So long, surplus

According to Moody's, East Providence was well on its way to realizing some semblance of financial health at the end of Fiscal Year 2010. The report found that as a result of the "General and School Fund combined," the city was in possession of "an operating surplus ... for the first time in five years."

But Moody's views the $6.3 million school deficit as a real problem. A hint at a remedy followed, as the report conveyed Moody's view that "It is important to note that the city currently has $6.3 million reserved in the General Fund to offset the School Unrestricted Fund deficit, which may be released back into the General Fund upon the elimination of the school fund deficit."

The report added that the "school fund deficits have been largely driven by an inability to accurately budget for special education costs."

Thursday's report made brief mention of the East Providence School Department's  that are to be funded through $15 million voter-approved Asset Protection Bonds. Currently, $6 million of the bonds have been used in Phase 1 of the projects which are focusing on upgrading and replacing fire and safety systems throughout the school district. An additional $9 million would be used in Phase 2, something Moody's reports as not having a damaging impact on the school.

"Moody's does not expect that this additional issuance will have a significant impact on the city's debt burden," the agency wrote in its report

Moody's also reported that East Providence's debt profile "will remain manageable" as it has a favorable debt burden of 0.9 percent.

'Slower Growth' with signs of life

Those hoping for an accelerated fix to the city's financial problems may have to wait longer, at least according to Moody's. The agency asserted in its report that "new growth will remain limited in East Providence due to the softened real estate market, and recessionary regional economic conditions." The document also reports that state wealth levels have declined and trail that of state and national levels. Yet, not all the of the substance in the report's "Slower Growth" subsection were negative.

Despite a lagging housing market and poor regional economy, the agency did relay better unemployment rates in 2011 of 9.8 percent, down from Rhode Island's median of 10.3 percent. The city's geography also was listed as an asset. The report mentioned East Providence's close proximity to the capital city, an employment hub.

A way 'up'

The Moody's report provides the city with a list of ways to climb out its negative outlook. The four suggestions include a "return to, and maintenance of, structurally balanced operations and improved liquidity levels; elimination of the accumulated deficit in the School Unrestricted Fund; significant expenditure reductions; and improved pension liability funding status, including full funding of public safety pension ARC."

While the report estimated that East Providence's negative outlook and "overall financial position will continue to weaken as underfunding of the required pension contribution persists and school operations remain imbalanced," it also maintained that addressing both of those issues would be considerations in future reviews, again hinting at a possible light at the end of the tunnel.