NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns 'A' ratings for the following City of Cranston, RI's (the city) general obligation (GO) bonds:
--$8.7 million GO bonds series 2015A;
--$21.7 million GO refunding bonds series 2015B.
The bonds are scheduled to price on June 23 via negotiation. Proceeds of the series A bonds will be used to fund city capital improvements. The series B bond proceeds will be used to advance refund the city's outstanding series 2006 bonds and provide for a current refunding of the outstanding series 2005 bonds.
In addition, Fitch affirms its 'A' rating on the city's outstanding series 2006, 2010A, 2012A and 2013A GO bonds and the outstanding series 2005 and 2012B GO refunding bonds.
The Rating Outlook has been revised to Positive from Stable.
SECURITY
The bonds are general obligations of the city backed by its full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
STABILIZED FINANCIAL OPERATIONS: The revised Rating Outlook to Positive from Stable reflects Fitch's opinion that Cranston's financial flexibility could strengthen due to growth in the tax base and recent stabilization of city and school fund financial operations. Management's willingness to raise revenues and reduce expenses, coupled with an increase in school aid funding, have resulted in adequate reserves and financial flexibility.
PENSION REFORM CONTROLS COSTS: The city's closed defined benefit pension plan is severely underfunded but recent pension reform efforts have controlled annual required contributions (ARC). After traditionally underfunding its payment of the ARC, the city has begun making full payment.
LOW OVERALL DEBT LEVELS: Overall debt levels remain low and should not change materially due to the city's limited debt plans and rapid amortization.
IMPROVED SCHOOL FUND PERFORMANCE: School fund operations have been positive the last three fiscal years with projections for another surplus in fiscal 2015. The school fund's deficit balance is projected to be erased by fiscal end 2015.
SOUND SOCIOECONOMIC INDICATORS: The city is the third largest populated city in the state and has experienced tax base growth in each of the past three years. Wealth levels are slightly higher than state and national levels, and unemployment rates have improved, but still exceed national levels.
RATING SENSITIVITIES
BALANCED OPERATIONS: Fitch expects city and school fund operations to remain balanced with the potential for slight growth in reserves. Continued growth in the economy and tax base along with continued stable operations could lead to an upward change in the rating.
CREDIT PROFILE
Cranston is a primarily residential community located just south of the capital city of Providence with the 2013 population of 80,566 reflecting 1.6% growth since 2000.
FISCAL PERFORMANCE REFLECTS STABILITY
City finances have essentially stabilized over the past three fiscal years due to a combination of city management actions. Revenues improved after a number of tax levy increases made during the fiscal period of 2011 - 2013. During this period, the city made staffing cuts to meet contractual obligations and successfully gained concessions from its bargaining units resulting in expense savings.
The city had historically been underfunding its closed city run pension plan. With the institution of a plan to reform benefits offered to its mostly retired former police and fire employees under its pension plan, the city was able to reduce its ARC and begin fully funding the ARC beginning in fiscal 2014. The city and its retirees came to a court-approved agreement wherein cost of living adjustments (COLA) have been frozen every other year with a reduced COLA in years 11 and 12. A small portion of retirees opted out of the court approved plan and no COLAs will be paid to them for the ten year period effective July 1, 2013.
The city's general fund experienced a net operating surplus after transfers of $626,000 for fiscal 2014. This along with payments received from the school fund as part of its deficit elimination plan boosted unrestricted general fund revenues to $22.8 million or a satisfactory 10.7% of spending. The operating surplus reflects higher than expected property tax revenues due to strong tax collection efforts and departmental savings.
SCHOOL FUND PROJECTS ELIMINATION OF DEFICIT BALANCE
The school fund had been making annual payments of approximately $1.5 million to the city as part of a deficit elimination plan resulting from a Supreme Court decision in favor of the city. This decision ended a lawsuit by the schools from 2008 that challenged city funding.
School fund performance continues to be positive due to better internal spending controls and an increase in state school funding. The school fund had a $3.8 million operating surplus ending the 2014 fiscal year resulting in a cumulative negative unrestricted fund balance of $3 million (2.1% of school fund spending). The school fund is projecting an approximate $1.5 million - $2 million operating surplus for fiscal 2015 helping reduce the deficit further. In addition, the city is waiving the school's final deficit elimination payment of $1.2 million essentially eliminating the negative balance. The state fair funding formula for education aid has resulted in an extra $3.4 million aid to the city for fiscal years 2016 through 2018 helping to restore school fund stability.
2015 BUDGET INCLUDES NO TAX RATE INCREASE
The city's fiscal 2015 budget was up 2.2% compared to fiscal 2014 and was approved without a tax increase for the third year in a row. Property tax revenues were budgeted up slightly due to some tax base growth and other departmental revenues are budgeted higher. Employee costs for salaries, pensions and health insurance drive the budget. Management is projecting a modest $0.5 million operating surplus for fiscal year end and a corresponding increase in unrestricted fund balance. However, the waiving of the school's final payment will result in a projected net $0.7 million decline in total fund balance.
2016 BUDGET REFLECTS INCREASED REVENUES DUE TO TAX BASE GROWTH
The $267 million budget for fiscal 2016 is up 1.7% compared to the fiscal 2015 budget and includes a 1.9% increase in the tax levy. Residential and commercial rates were reduced slightly as a result of a 3.9% increase in overall taxable values. Increased school aid from the state was partially offset by a reduction in state aid to the city. Departmental expenditures were not materially different compared to the prior budget.
LOW OVERALL DEBT LEVELS
Overall debt levels are low with debt to market value at 1.1% and debt per capita at $977. Debt ratios are expected to remain low as amortization of all debt is above average with 77% of par maturing in 10 years.
REFORM EFFORTS STEM GROWTH IN PENSION COSTS
Management has made significant efforts to address its compounding pension costs by successfully negotiating and implementing court approved reforms to the city's closed defined benefit pension plan effective fiscal year 2014. The city run plan is offered only to police and fire personnel hired before July 1, 1995. Even with these reforms, the pension plan is still severely underfunded as of July 1, 2014 at only 20% (using Fitch's 7% rate of return).
The pension reforms, which include a suspension of cost of living adjustments, contributed to the reduction of the total unfunded liability to $246 million (3.4% of market value) from a high $290 million. The amortization of the unfunded liability was revised to thirty years beginning in fiscal 2014 also helping to reduce the ARC to more manageable levels and control growth. The plan has 426 participants of which 33 are active employees.
City contributions ranged between 95% and 83% of the pension ARC in fiscals 2009 - 2013. The city began making full contributions in fiscal 2014 and is required to continue to do so pursuant to city ordinance and court order. The fiscal 2014 ARC was $21 million and represented 7.5% of total governmental spending. The fiscal 2015 budgeted amount of $22 million represents 100% of the required contribution.
The city has historically made 100% of its ARC to the state-operated municipal and teacher's pension plans for its employees. Costs associated with the state teachers' plan are expected to grow as the plan is considered weakly funded by Fitch.
The city contributed $5.4 million or a notable 106% of the ARC in fiscal 2014 for other post-employment benefits (OPEB). The unfunded OPEB liability as of July 2014 was $53.9 million. The school department funds its OPEB obligation on a pay as you go basis, and paid $0.86 million (66% of ARC) in fiscal 2014. The school department's unfunded OPEB liability was $11.7 million as of July 2014 and combined with the city's unfunded OPEB liability equates to a manageable 0.9% of market value.
Total carrying costs for all city and school employee pension ARCs, debt service and OPEB contributions were a manageable 17% of total governmental spending in fiscal 2014.
SOCIOECONOMIC INDICATORS ARE MIXED
Wealth levels exceed state averages with 2013 median household and per capita incomes at 114% and 104% of state levels, respectively. The city's unemployment rate dropped in February to 6.7% from 9.0% a year prior. Contributing to the decline was a drop in labor force by 1.0% and jobs increasing by 1.6% for the period. The state's unemployment rate was 7.0% in February.
The city benefits from its location proximate to the state capital and access to major highways. Management initiatives to spur economic development within the community have contributed to job growth and helped offset some tax base declines. There is no concentration in the tax base, and leading taxpayers consist primarily of real estate development properties. Indicative of the national trend, assessed valuation had declined for the past several years. However, new development and a slight improvement in housing values have contributed to recent growth of 3.9% in fiscal 2016.
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, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985833
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.