WARWICK, RI — Ahead of the city issuing about $6.2 million in new bonds next week to fund school renovations, bond rating agency S&P Global Ratings affirmed Warwick’s ‘AA’ rating for its existing bonds and applied the same rating to the new borrowing, Mayor Joseph Solomon announced Tuesday in a press release.
The bonds are part of a $40 million borrowing plan approved by voters as Question 4 on the 2018 ballot, with the rest of the bonds planned over the next four years. The state is expected to reimburse the city for 35 percent of that total, S&P reported.
According to S&P rating definitions, ‘AA’ is the second-highest designation that it gives for long-term debt; the rating “differs from the highest-rated obligations only to a small degree,” in that “The (borrower’s) capacity to meet its financial commitments on the obligation is very strong,” as opposed to the “extremely strong” description for AAA-rated bonds.
S&P also reaffirmed its ‘Stable’ outlook for the city’s finances while giving the new bonds, which will be issued by the Rhode Island Health & Educational Building Corp. on the city’s behalf, the same designation, Solomon explained.
“The city is pleased with the results of the recent rating review,” Solomon said in the statement. “The positive comments in the rating report support our efforts to stabilize and improve City finances and the cautionary comments provide a blueprint for our continued efforts to improve the City’s credit profile.”
In its report, S&P explained that its bond ratings are based on “the city’s very strong economy with direct access to the Providence metropolitan statistical area (MSA), coupled with a favorable debt-and-liquidity profile,” while noting Warwick’s ongoing issues with “high retirement costs associated with its large pension and other-postemployment-benefits (OPEB) obligation” and the “lack of a plan to sufficiently address the obligation.”
Solomon also pointed out S&P’s mention of “improved communication and oversight with the school department” as another positive note for the city.
‘Challenging’ budgets in last two years
Among the cautionary notes in its report, S&P pointed to what it called “a more challenging budgetary environment in the last two years,” including an estimated $1.6 million general fund deficit for FY18 and an expected $2.8 million budget deficit for FY19, which ended June 30.
That FY18 deficit resulted from increased school costs and the use of reserve funds that were transferred from the FY17 budget (meaning they were counted as spending in the FY18 budget), S&P explained.
Overall, the city’s total reserves went down by $5.8 million in FY18, according to the audit released by Blum, Shapiro and Associates. | Read: Auditing Solomon’s Claims About the New Warwick Audit
For the FY19 budget, S&P reported that Solomon’s decision to impose a 5-percent spending cut on all city departments in the middle of FY19, along with leaving some positions vacant, could leave the city with as much as $5.8 million “for fire department contract settlements and any potential school-related deficits.”
As of the report’s release, the city and fire union were still in arbitration over a new contract, after Solomon initially announced an offer that the union later rejected.
On the FY20 budget, S&P noted the city’s plans to use $2.4 million in reserve funds and put another $4 million into the school budget, “which it will likely fund by cutting certain costs in other departments,” in addition to the recent property revaluation and 3.5-percent tax increase, in its review of the city’s finances.
Pension costs still a concern
Amid the generally positive news, S&P also pointed to the city’s unfunded pension liabilities as “a credit weakness,” with the city spending about 17 percent of its FY18 budget on pension and OPEB costs.
Of the city’s five designated pension funds, the Police Pension I and Fire Pension Plan is less than 25 percent funded, putting it in “critical status,” according to the Rhode Island Retirement Security Act of 2011, S&P reported, adding that if the city continues to pay its annual contributions at 100 percent, the plan will reach full funding in 2035.
The other four pension plans — Warwick Employees’ Pension trust, Warwick Public School Employees’ Retirement Plan, Police Pension II and Fire Pension II — are all at least 75-percent funded, above the state-mandated 60-percent minimum.
Earlier this year, Solomon announced that the city had lost an arbitration ruling about the Fire Pension II program, at a cost of $2.6 million, because former Mayor Scott Avedisian had not negotiated the new pension rules into the last fire contract.
S&P concluded its report by saying that “we expect Warwick will likely maintain, at least, adequate budgetary flexibility,” while referring to the pension and OPEB costs as “a long-term credit concern.”
The agency also stated that, while “we do not expect to change the (city’s credit) rating within the two-year outlook period,” the city’s financial performance in the future could result in higher or lower ratings.
Read the Warwick 2019 Bond Rating Report below: