Fitch Places Woonsocket Bonds on Negative Watch List

Fitch Ratings delivered a foreboding message regarding the future of Woonsocket's bond status on Thursday, placing the city on Rating Watch Negative. The distinction serves as a warning that Woonsocket's $117.8 million in bonds could be further downgraded next month after the ratings company receives the final 2011 audit report from Braver PC.

"The negative watch means it's more likely to be downgraded," explained Finance Director Thomas Bruce. "They'll be watching us closely for the next month."

The news comes on the heels of a near disaster regarding payroll for School Department employees. The state initiated an emergency transfer of funds three days early on Thursday because the Woonsocket Education Department does not have the $1.7 million required to fund their payroll account.

Woonsocket's bonds are currently rated 'BBB-' and a lower credit rating would put the debt below investment grade, preventing refinancing and making it nearly impossible for the city to secure even short term loans. "No bank is going to step forward and issue you any money with a 'C' level," said Bruce.

The watch is the direct result of the city's estimated combined with conflicting financial reporting to the agency. Business Manager Stacey Busby reported a surplus to Fitch in February and the School Department's deficit came as a surprise to both rating agencies and city officials when it was identified in draft report by auditor Robert Civetti earlier this month. The final 2011 report from Braver is expected next Friday.     

"The deficit projection follows earlier estimates of a positive budgetary basis ending balance, and relates largely to without corresponding resources to cover the expenditures," a press release from the credit agency stated.

"There's a credibility issue from the School Department in financial reporting," explained Bruce. "Now everything will need to be verified more extensively."

The release by Fitch also mentions WED's liquidity concerns as a potential hazard. The department has burned through most of the city's $13 million appropriation for education and with the city running on its own precise and limited budget, cash advances depended on in previous years have become impossible. The department now has a mere $99,319 left in city appropriations, and has depleted the total about a month earlier than last year.

State and federal revenue will still provide WED with $4.7 million a month, but there is no guarantee the money will be available when the department runs into immediate needs.

"Cash has become a critical factor," said Bruce. "There are times during the year when the city does not have the ability to forward money."

After the School Department bounced payroll on several occasions in in 2009 and 2010, Citizens Bank forced them to sign a special agreement requiring that they fund the account two days in advance of issuing employee checks. After realizing the department would not make the Wednesday, Dec. 28 deadline for the Dec. 30 pay cycle, State Revenue Director Rosemary Booth Gallogly altered the state's schedule to avert the crisis.

Fitch views the possibility of state oversight as a positive factor. One likely solution for WED's fiscal troubles is appointment of an overseer, and though the move would likely result in loss of some local financial control, it may ultimately help to avert a negative rating. "The state could issue a supplemental tax bill and the city would have no control," said Bruce.  

Superintendent Dr. Giovanna Donoyan submitted a to the state's general auditor to address the deficit last week, identifying $400,000 in potential savings and requesting a five year deficit reduction plan. The state has not yet approved the plan, and has requested specific cashflow and expenditure information from the city. The state is expected to provide an assessment following receipt of the requested data.

The agency also looked at WED's projected deficit for 2012 as a factor.

"The school fund is projecting a deficit for fiscal 2012 and has very limited expenditure reduction options available to address the imbalance," explained the Fitch release. Elimination of the fiscal 2012 deficit is also expected to be addressed by the state.

The document goes on to list factors that could trigger a rating action including further financial deterioration, continued internal control problems, inadequate response to the deficit, and liquidity concerns. The full communication from Fitch is attached above.