NEW YORK – Fitch Ratings has downgraded Woonsocket’s $118 million general obligation bonds from ‘BB-’ to ‘B’ and rated the outlook ‘negative.’
The downgrade “reflects financial stress due to ongoing school fund deficit operations and liquidity issues, which the city sought to alleviate with a proposed supplemental tax bill that has now stalled in the state legislature,” according to the Fitch report.
The tax proceeds were meant to cover the cashflow needs of the Woonsocket school system through June 30th and support fiscal year 2013.
The city is projecting a cumulative negative school fund balance at the end of 2012 of roughly $10 million, or 7.6 percent, of general fund and school fund spending, according to Fitch.
“Alternatives to address current year liquidity issues and the cumulative budget deficits are still to be determined,” said the report.
Woonsocket’s negative outlook reflected the likelihood of long-term financial pressure “as the city attempts to bring its finances back to balance.”
The report said that Fitch viewed the implementation of a state budget commission positively and that it will continue to monitor the city’s credit and take rating action whenever appropriate.
Fitch said that deficiencies in the internal fiscal controls of the school department – an autonomous division of the city – led to the $2.7 million 2011 school fund deficit. The 2011 school year budget was originally reported with a positive ending balance.
“The significant projected deficit for fiscal 2012 surfaced precipitously and well into the fiscal year, further indicating deficiencies in financial management,” said the report.
Earlier in the week, the Woonsocket City Council voted to request the implementation of state budget commission oversight on city and school department finances.
The state approved the request and the commission is slated to begin meetings at the end of the week.
“The Commission has the authority to expedite approximately $3.3 million in state school aid due at the end of June and intends to address this request at its meeting this week,” said the report, adding that management has indicated it plans to use the state aid to cover payroll expenses through the end of June.
Fitch warned that total cash needs would exceed the available resources.
“For the last three years, Woonsocket has been hurt by significant cuts in state aid, a weak economy and overspending by school department officials,” said the report.
“The city faces a significant structural budget imbalance and will need to pursue means in addition to the proposed supplemental tax … to bring spending in line with revenues,” said Fitch.