Fitch Maintains Rating Watch Negative on West Warwick, RI's GOs

NEW YORK--()--Fitch Ratings is maintaining its Rating Watch Negative on the following town of West Warwick, RI's (the town) outstanding general obligation (GO) bonds which are currently rated 'BBB-':

--$3.60 million GO bonds, series 2007;

--$1.22 million GO Bonds, series 2005;

--$6.35 million GO bonds, series 2002A.

SECURITY

The bonds are general obligations of the town and secured by its full faith and credit and unlimited taxing authority.

KEY RATING DRIVERS

RATING WATCH REFLECTS UNCERTAINTIES: The Negative Watch reflects Fitch's concern over management's near-term ability to achieve substantial labor concessions in order to rein in increasing long-term retiree costs.

GROWING FUTURE RETIREE COSTS: The low investment grade rating reflects the growing budget pressures due to insufficient progress towards alleviating very high unfunded pension and other post-employment benefit (OPEB) liabilities. A history of annual pension contributions significantly below actuarially required levels has exacerbated unfunded levels and substantially increased future funding costs.

COMPOUNDING BUDGET PRESSURES: The town's budget pressures are compounded by statutory revenue limitations, a shortage of additional cost cutting solutions, financial exposure to prior years of school budget underperformance and a town charter requirement for budget approval by referendum.

COMBINED RESERVE BALANCES MODERATELY LOW: The school department has overspent its budget in prior years, resulting in a deficit fund balance. When combined with the town's general fund balance, reserve levels are moderately low. Projections for fiscal 2013 show reserve levels increasing.

WEAK DEMOGRAPHICS: Demographics are weak, with relatively low wealth levels, high unemployment and declining assessed values.

LOW DIRECT-DEBT RATIOS: The town's overall debt levels are low with rapid amortization.

RATING SENSITIVITIES

AGREEMENT WITH RETIREES AND ACTIVES: Fitch expects budget pressures to worsen absent meaningful pension and healthcare cost savings. A lack of significant progress in addressing these growing costs in the near term will result in a downgrade.

MAINTENANCE OF INVESTMENT GRADE RATING: The rating could stabilize at the current low investment-grade level if the town is successful in achieving both decisive pension/OPEB reform and budget balancing measures.

CREDIT PROFILE

West Warwick is 11 miles south of Providence. The 2012 population of 28,861 represents a 2.1% decline over the 2000 census.

DISCUSSIONS WITH ACTIVE EMPLOYEES AND RETIREES ONGOING

Management continues to negotiate with its active employees in connection with the expiration of its labor contracts on June 30, 2013. It is seeking significant concessions related to healthcare contributions and temporary reform and suspension of certain pension benefits. It has also been negotiating with its retirees and is seeking similar pension savings. Management has indicated that it expects to enter into revised agreements with its two major unions by early 2014. Fitch believes that successful negotiations should lead to a revised annual required contribution (ARC) for its pension that is more attainable along with reduced future liabilities. However, a structural budget imbalance will likely still exist without an increase in operating revenues.

ELEVATED PENSION AND OPEB LIABILITIES

The funded ratio for the town-operated single-employer municipal employees' pension plan has dropped precipitously to 24% as of July 2011 from 45% in 2006. Using Fitch's 7% rate of return the estimated funded ratio drops to 22%. The unfunded liability totaled $110 million as of July 1, 2011, or a high 5.2% of fiscal 2014 assessed value (AV).

The approximate annual cost for pension benefits is $9 million, according to management. Combined town and employee contributions account for roughly 59% of the cost with the remainder coming from available plan assets. The town estimates that current assets are sufficient to fund its pensions for only the next seven to nine years.

The town's fiscal 2012 contribution to its pension plan was $1.1 million compared to the $8.7 million ARC; a low 13%. This follows a $1.3 million contribution in 2011 (19%). Management increased its contributions in fiscal 2013 to 33% of the estimated $9.2 million ARC, leaving a $6.2 million shortfall (8% of budget). The town fully funds the ARC to the state's Employee Retirement System (ERS) for its teachers.

The town's unfunded OPEB liability as of June 30, 2011 was a similarly high $107 million. The fiscal 2012 ARC was $7.6 million. The town is currently making pay-go payments which totaled $4.9 million (64% of the ARC) in fiscal 2012, equivalent to a high 5.5% of governmental spending less capital.

CONSTRAINED REVENUE FRAMEWORK

The town's revenue framework is constrained by the state tax cap and limited budget control. The town is subject to a statutory annual tax levy cap increase of 4% over the prior year's levy unless it qualifies for certain exemptions relating to loss of non-property-tax revenues, emergencies, or payment of debt service. Any tax levy in excess of the cap is subject to 4/5th approval by town council and approval by the state auditor general.

West Warwick's charter requires its budget (including any tax levy over the cap) to be approved by voter referendum. If approval is not received, the town can operate under the previous year budget until the succeeding budget is approved. Fitch believes this charter provision hamstrings management's ability to efficiently cure budget imbalances, and near-term attempts to impose tax levy increases may prove challenging.

EXPOSURE TO SCHOOL DEFICITS; IMPROVING RELATIONSHIP

The town's budget, like those of all RI communities, is also generally exposed to school budget deficits over which town management has little control. In July 2012, the town and school department developed an agreement to eliminate the school budget deficit over five years. In fiscal 2013 the town restored funding of the 5% cut in maintenance of effort that was made in fiscal 2011 and increased funding by an additional $300,000.

The fiscal 2012 audited results reflect a $1.9 million general fund transfer to the school fund as part of the agreement, resulting in a reduced accumulated school deficit of $1.7 million. For fiscals 2013 and 2014, $332,000 was budgeted as part of the five-year deficit elimination plan.

RESERVE LEVELS MODERATELY LOW

The town ended fiscal 2012 with a net general fund operating surplus (after transfers) of $1.1 million. However, the town would have had a sizable deficit had it paid its pension ARC. The town's unrestricted general fund balance totaled $5.8 million or 7.3% of town and school fund spending. When combined with the school fund deficit of $1.7 million, the balance drops to a moderately low 5.2%.

Management is projecting a small general fund operating surplus of approximately $151,000 for fiscal-end 2013 as operations trended as expected. Again, pension contributions of $3.1 million remained far below the plan's estimated $9.3 million ARC.

The school department is projecting a larger $1.3 million surplus and will consider accelerating the original timeframe for paying off the accumulated deficit in the school fund.

FISCAL 2014 BUDGET INCLUDES 3.9% TAX LEVY INCREASE

The town's voter-approved fiscal 2014 budget of $83 million is a 4.3% increase over fiscal 2013. The budget includes a $1.9 million (3.9%) tax levy increase. Incorporated in the tax increase is approximately $750,000 in additional revenue generated from the decrease in the motor vehicle exemption to $1,000 from $2,500. The combined school and town pension contribution is $3.4 million, below the estimated $10 million ARC. The budget does include an OPEB contribution in excess of pay-go of $843,000, a first for the town, and also includes increases in health insurance and school funding.

LOW DEBT RATIOS

Overall debt levels are very low at 0.9% of fiscal 2014 AV and $627 per capita. Management has indicated that it plans to bond for $6.6 million in school improvements, of which 51% would be subject to reimbursement from the state, mitigating any material change in debt levels. Other maintenance needs and capital improvements are planned to be made on a pay-as-you-go basis. Debt amortization is above average with 72% of par maturing in 10 years.

Total carrying costs for the full town-pension plan ARC, ERS contributions, OPEB pay-go and debt service represents a moderately high 22% of fiscal 2012 governmental spending. Carrying costs are estimated to increase rapidly over time unless successful pension reform is implemented.

BELOW-AVERAGE ECONOMIC INDICATORS

Wealth levels are slightly below state and national averages. Unemployment remains high at 9.0% in October 2013, but has improved from 9.8% a year prior.

The town was formerly an industrial and textile center and progress has been made in industrial diversification with several larger former textile mills converted to multiple tenancy by smaller, newer businesses. Management expects that expansion amongst existing businesses combined with new development will increase assessed values.

AV was $2.1 billion for fiscal 2014, a decrease of 9% from the prior year. The town underwent a three-year property revaluation effective Dec. 31, 2012 and the decline reflects a housing market that was struggling but is showing signs of improvement. Housing values increased 2.3% year over year through Oct. 31 according to Zillow.com.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and the National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812130

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Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Kevin Dolan, +1-212-908-0538
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Amy Laskey, +1-212-908-0568
Managing Director
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com