Eastbayri.com

EAST PROVIDENCE — Just because East Providence’s bond rating has been downgraded to “junk” status doesn’t mean the city cannot continue to do business.

These were the words of East Providence City Manager Peter Graczykowski as he addressed the school committee at a regular meeting Tuesday night. A day earlier, Moody’s Investors Service announced it was moving the city’s bond rating from Baa1 to Ba1, a level commonly referred to as “junk” status though Mr. Graczykowski said he prefers “speculative quality.”

The news came as the school department sits in-between phases of a $15 million life safety bond construction project aimed at improving the conditions of schools around East Providence. To date, $6 million of the project has been carried, the majority of which was done last summer.

Farrar and Associates has been the school department’s project manager overseeing this construction. On Tuesday, company president James Farrar spoke about the work, where it stands today and what needs to be done for it to be finished.

Mr. Farrar said the first phase of work addressed a variety of problems including but not limited to sprinkler systems and fire alarms. He said it also addressed some concerns raised by the Rhode Island Department of Health.

During this initial phase of work, however, Mr. Farrar said a dialogue began with the DOH centering on what they would like to see completed in the next phase of work. School department finance director Mary King said fire inspectors also have work they want to see completed with phase II.

The current goal is for construction of phase II to begin when the school year ends.

For this to happen, Mr. Farrar stressed the importance of planning. Already, Mr. Farrar said the timeline is becoming “extremely tight.” He added that during phase I, a shortened planning period lead to some “anxiety” and “hardship.”

Mr. Farrar said it’s “very important” for the balance of work to continue, not only to address other issues at school buildings but to ensure the city doesn’t lose a reimbursement through the Rhode Island Department of Education. To pay for the remaining work, Mr. Graczykowski previously stated the plan is to issue $15 million of bonds, including $6 million to pay off what has already been issued and $9 million to finish the project. Mr. Graczykowski said the plan is to issue these bonds in April.

Speaking to the school committee, Mr. Graczykowski said the rating downgrade doesn’t mean the city cannot access the market, it just means it will be more difficult and more expensive to borrow. Mr. Graczykowski said he cannot guarantee anything but he is “optimistic.”

Both Ms. King and Mr. Graczykowski said a meeting was scheduled for school and city officials on the issue later this month. Ms. King said she shares Mr. Graczykowski’s optimism but the project manager needs to know they will get paid for the planning stages of phase II. Mr. Graczykowski said if the project manager is not comfortable with the city’s assurances, the project may have to move forward with another firm.

Issuing the remaining $9 million in bonds will also need approval of fiscal overseer Major Steven M. Bannon.

As for the Moody’s downgrade, the decision comes almost five months to the day after the city’s rating fell from A1 to Baa1 in August.

“The downgrade reflects the city’s ongoing financial strain, compounded by the growing accumulated deficit in the school unrestricted fund; a heavy reliance on cash flow borrowing; and increasing fixed costs related to pension and OPEB [other post employment benefits] liabilities,” reads the summary rationale of Moody’s report.

“The downgrade also incorporates the recent appointment of a fiscal overseer by the state, which signals the severity of the city’s fiscal challenges.”

Furthermore, the report states that in addition to ongoing revenue weaknesses and expenditure demands, “it is not clear that the city will continue to benefit from access to the capital markets necessary to provide operating cash flow including the issuance of tax anticipation notes [TANs] and deficit reduction notes to finance government operations.”

Because the city’s tax collection cycle is not aligned with its fiscal year, East Providence issues TANs on an annual basis to resolve short term cash flow issues in anticipation of tax revenues and state aid. Last fiscal year, the city issued $32 million in TANs, reads Moody’s report, with plans to issue $30 million this fiscal year.

“The city will likely issue $10 million in TANs in mid-December, and an additional $20 million in January, both of which it is planning to place privately with a financial institution,” reads the report.

“Without the December borrowing, the city is expected to run out of cash by mid-month. Management reports that a verbal agreement is in place with a major national bank for the first $10 million issuance.”

In response to the report, the city issued a press release on Tuesday, Dec. 13. In the release, Mr. Graczykowski said the downgrade is an: “unwelcome development, as the city is stabilizing the current financial position and establishing a long-term plan for recovery.”

The city finished fiscal year 2011 with a cumulative historical deficit of about $7.2 million, $6.3 million of which existed at the end of fiscal year 2010 and roughly $900,000 of which was accumulated this year. The deficit as a whole has stemmed from the school department side of the budget.

The city also started its fiscal year 2012 budget process with a school committee approved budget requesting an additional $7.2 million in funding for this fiscal year over last. The Moody’s report says this funding gap came on the heels of increased employee benefit and special education costs combined with a reduction in federal stimulus money.

As of Monday, this hole had been reduced to about $1.18 million through a variety of means including a property tax increase, a reduction of school employees and anticipated savings from pension reform, among other areas. Furthermore, the city council is waiting to hear back on an analysis of several proposals put forth at its most recent meeting of Tuesday, Nov. 29, on top of findings from a management audit expected to be delivered later this week.

The Moody’s report and the city’s press release both state the city council will receive a revised budget at a meeting on Tuesday, Dec. 20.

“It is important to recognize that the city has made significant gains toward fiscal stability under the leadership of the current city council and school committee, as well as its new finance director who is now working with the permanent city manager,” said Mr. Graczykowski, who came to East Providence in October.

In its report, Moody’s states another reason for the downgrade is “consistent underfunding” of the city’s pension system. In fiscal year 2010, the report states East Providence contributed only 20 percent of its actuarially required contribution (ARC) and only 21 percent of the ARC in fiscal year 2011. Even with a plan to increase its contribution to 26 percent of the ARC, the report states Moody’s considers the practice to be the equivalent of “deficit financing,” with an anticipation the liability will continue to grow.

The Moody’s report also mentions the recent appointment of a fiscal overseer.

“The State of Rhode Island had chosen to intervene in the City’s finances for the same reasons Moody’s cites for its rating,” said Major Bannon in the city’s press release.

“However, I believe the state’s assistance will help stabilize the city’s financial position. This is why I was surprised by Moody’s inclusion of the fiscal oversight among the reason for the rating downgrade.”

Mayor Bruce Rogers said the school committee, city council and school department have made “significant progress” in addressing the deficit.

“City manager Graczykowski has managed to reduce this year’s deficit by over $6 million while only having arrived in his position in mid-October,” said Mayor Rogers in the city’s press release.

“As we are on track to balance the budget, the bond rating change comes as a setback, which I fully disagree with.”

Moody’s report states the city could improve its rating through successful issuance of TANs for FY12, an elimination of the school department deficit and significant expenditure reductions. Failure to obtain FY12 cash-flow borrowing could result in a further downgrade, however, as could failure to close the current fiscal year funding gap and further weakening of public safety pension plans.

Moody’s report states the rating remains under review, to be conducted within the next 90 days.