Woonsocket Faces Financial Chaos
Thursday, June 13, 2013
Woonsocket is facing a worsening storm of financial issues, including a severe cash crunch, a deepening deficit, and a rising unfunded pension liability—raising renewed fears that the city could be on the brink of bankruptcy, GoLocalProv has learned.
“If enough of it piles on, it could push us to the edge,” said John Ward, the city council president.
The financial hole is just too big to fill at this point, said Michael Morin, president of the city firefighter union. “I’m not convinced we’re not going to end up in bankruptcy,” Morin said.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTAfter this week’s bond rating downgrade, the stark reality of the city’s finances has once again been thrust into the spotlight. In particular:
■ Pensions: The city will miss its annual $1 million payment into the municipal pension system. That now is scheduled to be made in August. In accounting terms, the payment will be counted for the current fiscal year but in actuarial terms it won’t, further weakening a pension system that is already less than 60 percent funded.
■ Deficits: The city is facing a $3.4 million deficit in the current fiscal year, largely due to shortfalls in the school department. Overall, the city has racked up $11.5 million in deficits since 2010.
■ Debt: Woonsocket has been at risk of missing a $4.8 million debt payment due July 15.
■ Payroll: As of this past Tuesday, the city did not have enough funds to cover the first three pay periods in the upcoming fiscal year, according to the city finance director, Thomas Bruce.
The city’s reputation in the credit market could be headed for more trouble too. “We’re bracing for another downgrade,” Bruce said. After a conference call with Moody’s Investors Service Wednesday afternoon, Bruce said that assessment had not changed.
A spokesman for Moody’s yesterday evening confirmed the city remains under review for a potential downgrade. He said the review would be completed in the next 30 to 90 days.
This week’s downgrade brought Woonsocket to a B3. The next level is C, which is where Central Falls was when it declared insolvency, Bruce noted. “C level is synonymous with bankruptcy," Bruce said.
Budget commission may have delayed the inevitable
When similar alarms were sounded one year ago, a state-run budget commission was established to fix city finances. But one year later, the city has found itself back where it started, at least in financial terms. “The financial situation of the city hasn’t improved. Period,” Bruce said.
This will be the second year in a row that the city has missed its annual pension payment. Next year, the city will not only have to make up this year’s payment, it also will have to cough up an additional $3.5 million that the budget commission has concluded is necessary to fully fund the city-run pension system.
The city is also seeking a $12 million cash advance on state education aid for the second year in a row.
Bruce said credit ratings agencies may be evaluating Woonsocket’s financial health based on what the comparable circumstances would be in another state that did not have anything like Rhode Island’s law on distressed communities, which is the legal basis for the budget commission. “I think we would be in bankruptcy already,” Bruce said.
Woonsocket running out of time
Bruce said the city needs action in three areas to avert further fiscal deterioration: the advance in state aid, an estimated $9 million in concessions from unions, and $2.5 million in a supplemental tax bill. As of this writing, none of those budget-saving measures is guaranteed.
“The rating could fall if Woonsocket is unable to secure a supplemental tax, TANs [tax anticipation notes] or a state aid advance in order to meet near-term debt service payments; if it continues to show severe liquidity strain; or if the accumulated operating deficit continues to deepen,” said Moody's spokesman David Jacobson. (On the other hand, Jacobson said a rating increase is also possible if liquidity improves, dependence on state aid advances is reduced, the deficit declines on the school side, and the city makes progress on its “large unfunded pension liability.”)
Tomorrow, the budget commission is expected to pass a resolution asking for the advance in state aid. But the move would need the formal approval of state Education Commissioner Deborah Gist. So far, no decision has been made, Gist spokesman Elliot Krieger said last night.
The city is reaching out for help from every quarter. Yesterday, for example, the city received a $2.8 million advance payment on next year’s taxes from CVS. But there’s an obvious downside: now, that’s $2.8 million in tax revenue the city won’t be getting next year. The same goes for the advance in state aid.
“It’s absolutely a boomerang effect,” Bruce said.
The city is also running out of time: both negotiations over union concessions and the supplemental tax bill remain at a standstill. The House and Senate have passed versions of the supplement tax bill, but state lawmakers are holding up final approval until the outcome of negotiations with city unions is known, according to Bruce. State Rep. Lisa Baldelli-Hunt, D-Woonsocket, said lawmakers is waiting because it wants to make sure taxpayers aren’t the only ones who are burdened.
But the unions could be using the delays on the supplemental tax bill to stall negotiations, Ward said.
“Nobody seems of a mind to make a move,” Ward said.
Morin said that local labor leaders are not purposely holding up negotiations, which have been underway since November. Instead, he said the delay is stemming from how much the city is demanding in concessions. “They’re just asking for so much,” Morin said. “It’s just so hard to reach their goal.”
Now, with just weeks left in the fiscal year, it may be too late to issue tax bills, according to Ward. “That whole concept may be off the table,” he said.
But the city has not waited for negotiations in order to enact cuts. Last month, the budget commission approved a series of unilateral changes to benefits for workers and retirees, mostly in health care, that are expected to save more than $4 million and take effect in July. Ward said the commission had been assured that the move was legally defensible.
Bruce, however, says that likely won’t stop city unions from seeking a temporary stay of the cuts in court. Morin also said he believes the city is headed for court challenges. (The firefighters and teachers, he noted, are already on the health plan that the city is forcing the other unions to adopt.)
State rep: I was misled by mayor
Baldelli-Hunt yesterday expressed anger and surprise at the state of the city’s finances.
“I’m angry. As a legislator, I feel that I’ve been misled at a time we’re trying to push through legislation to avoid municipal bankruptcy,” Baldelli-Hunt said, referring to the supplemental tax bill.
Baldelli-Hunt said that state lawmakers had questioned Woonsocket Mayor Leo Fontaine about the municipal side of the city budget and had been told there were no problems.
“There was no indication there was a problem,” Baldelli-Hunt said. “That leads me to believe they were using smoke and mirrors all along.”
Baldelli-Hunt, who is also running for mayor in this year’s election, faulted the city administration for failing to promptly share information with state lawmakers. Only within the last week did she become aware of the postponement of the annual pension payment, Baldelli-Hunt said. She added that she had unaware of other details of the city’s financial condition. (Fontaine did not respond to a request for direct comment.)
Even so, Baldelli-Hunt said she still supports the supplemental tax bill.
State officials come under fire
State officials, in turn, are starting to take some flak from local officials.
Some are questioning the effectiveness of the budget commission, which has a majority of members who are appointed by the state revenue director, Rosemary Booth Gallogly.
“While the commission has implemented positive changes, Woonsocket continues to experience budget deficits, structural imbalances, and strained liquidity,” Jacobson said. “The commission also took several months reviewing Woonsocket’s spending and accounting records, and are still implementing their recommended changes.”
Bruce said the commission has spent much of the year searching for fat to cut in a city where there is none: for every three desks in city offices, he said two are vacant. The commission has also exhaustively reviewed the municipal side of Woonsocket’s financial controls and decision-making process. But those were in already good shape, according to Bruce.
“I think if they weren’t, you wouldn’t be talking with me,” Bruce said. “I wouldn’t be here.”
Gary Sasse, a former state administration director, said the budget commission had done a “good job” and deserved credit for formulating a plan to move the city forward financially. “The problem is the process,” Sasse said. “If the process can’t come to a timely solution, then you may have to look at receivership.”
State officials have vowed to avoid receivership. But that may not necessarily be a good thing for Woonsocket.
Ward said he suspects the main reason Governor Lincoln Chafee and Gallogly don’t want bankruptcy for Woonsocket is the impact it may have on the state’s reputation and credit rating. He suggested that in staving off bankruptcy, the budget commission is helping the state but potentially hindering the city in reaching a resolution on its financial issues.
“In order to protect their corner of the world they allow the city to flounder somewhat,” Ward said. “I think they’re more interested in protecting the state … than the city.”
Asked if a second municipal bankruptcy would further tarnish the state’s reputation, Sasse said it hurts the state’s reputation more to have a city break down financially with no solution.
Neither Chafee’s office, nor Gallogly responded to requests for comment yesterday.
Bracing for bankruptcy
In some ways, Woonsocket is already bracing itself for the possibility of a bankruptcy. Bruce noted that the budget commission has adopted a five-year plan for improving city finances. That plan could easily be picked up and implemented by a state-appointed receiver, helping the city avoid the high costs that were incurred by receivers in Central Falls, Bruce noted.
The specter of bankruptcy is also weighing on the minds of the city workforce. If city firefighters and other workers concede too much, Morin said that puts them at a lower financial starting point in a bankruptcy process.
At the same time, he realizes that it’s their best interest to avoid bankruptcy. “I don’t really want to give up anything but I have to,” Morin said. “It doesn’t help firefighters to see the city fail. It doesn’t help firefighters one bit to see Woonsocket go into bankruptcy.”
Stephen Beale can be reached at [email protected]. Follow him on Twitter @bealenews
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