NEW YORK–(BUSINESS WIRE)–Fitch Ratings upgrades the following ratings on the town of West
–Long-Term Issuer Default Rating (IDR) to ‘BBB’ from ‘BBB-‘;
–$3 million GO bonds, series 2007 to ‘A-‘ from ‘BBB-‘.
The Rating Outlook has been revised to Stable from Positive.
The Long-Term IDR reflects the town’s unsecured general credit quality;
the security rating on the GO bonds, two notches above the IDR, reflects
the enhanced recovery prospects provided by the statutory lien granted
under state law.
The bonds are general obligations of the town backed by its full faith
and credit and unlimited taxing authority. The Rhode Island State
General Assembly enacted amendments to Section 45-12-1 of the General
Laws to provide GO bondholders with a statutory lien on ad valorem taxes
and general fund revenues of cities and towns with priority over
creditors in the event of a bankruptcy of the issuer. Fitch believes
that this provides bondholders a substantial preferential right in a
KEY RATING DRIVERS
ISSUER DEFAULT RATING: The upgrade of the town’s Long-Term IDR to ‘BBB’
from ‘BBB-‘ reflects the stabilization of operations through pension and
OPEB reforms and long-term employee contracts. These actions, combined
with a five year operating plan, have provided budget relief, a reduced
burden on the tax base, and a lowering of the long-term liabilities
associated with retiree benefits. Fitch expects future costs tied to
salaries and pensions to pressure the budget but expectations for
moderate revenue growth combined with future revenue increases should
support such growth. School fund operating performance has been positive
resulting in excess reserves available for school operations alleviating
general fund pressure.
GENERAL OBLIGATION BOND RATING: West Warwick’s ‘A-‘ rating is two
notches above the town’s IDR reflecting the statutory lien security
attached to GO bonds issued in Rhode Island and the resulting enhanced
Economic Resource Base
West Warwick is 11 miles south of the state capital city of Providence.
The estimated 2015 population of 28,852 represents a 1.2% decline over
the 2010 census figure.
Revenue Framework: ‘bbb’ factor assessment
Property taxes make up the bulk of the city’s revenues, providing for
predictability and stability. Fitch expects future revenue growth to be
generally in line with inflation without revenue-raising measures.
Although the state statutory tax levy restrictions that limit annual tax
levy increases to 4%, with some exceptions, provide a reasonable amount
of tax raising flexibility, West Warwick does not have the independent
legal ability to raise revenues because its charter requires its budget
to be approved by voter referendum.
Expenditure Framework: ‘a’ factor assessment
Expenses have been recently controlled due to local pension reform
efforts, implementation of long-term employee contracts, and
stabilization of the town’s school fund, but Fitch expects that the
town’s overall spending needs will increase in the future at a pace
above natural revenue growth due to the demands of weakly funded
pensions and pent-up labor costs. Carrying costs related to long-term
liabilities (currently about 20% of government spending) are expected to
remain elevated, but manageable. Town control over headcount, wages,
benefits and work rules is limited by staffing and labor contracts
Long-Term Liability Burden: ‘a’ factor assessment
Unfunded pension liabilities are elevated but somewhat offset by low
debt levels. These combined liabilities represent a moderate 18% of
personal income. Fitch does not expect debt levels to materially change
over the next few years and the town fully funds its pension and has
begun making 100% contributions toward OPEB; however, the fact that more
than 80% of the total liability figure is in the form of unfunded
pension liabilities makes the figure more variable.
Operating Performance: ‘bbb’ factor assessment
The town implemented a five-year financial improvement plan effective
fiscal 2015 that has helped stabilize its fiscal condition. The plan
followed a period of financial pressure related to large cuts in state
aid, compounding pension liabilities as a result of a history of
underfunding annual pension contributions, and exposure to school fund
operating deficits. Operating performance could be stressed in a future
potential economic downturn although Fitch expects the town would
recover financial flexibility.
PRUDENT FINANCIAL MANAGEMENT: Management’s ability to manage costs and
retain financial flexibility, including through reserve funding, is key
to maintaining the rating. A material improvement in Fitch’s
expectations for the economy and tax base growth as well as reserve
funding could support a positive change in the rating.
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 reports a notable increase in the number of
building permits compared to last year reflecting both residential and
commercial improvements and expansion.
Assessed value (AV) declined by 8.7% in fiscal 2014 due to a triennial
property revaluation effective Dec. 31, 2012. The decline reflects a
housing market that was struggling but has since shown signs of
improvement. AV net of exemptions has steadily improved since fiscal
2015 as new projects come on line. Housing values increased 11% year
over year through May 2016 according to Zillow Group but are still
notably below peak levels.
Wealth levels are slightly below state and national averages and
unemployment levels are consistently above state and national rates.
The town’s primary revenue source is property taxes, which represented
about 92% of fiscal 2015 general fund revenues. State and federal
revenues provided to the town (exclusive of school aid) were only 4.5%
of revenues in fiscal 2015 and can vary each year depending on grant
programs that are offered.
West Warwick’s charter requires its budget (including any tax levy
increase) to be approved by voter referendum. If approval is not
received, the town can operate under the previous year’s budget until
the succeeding budget is approved.
Fitch expects West Warwick’s revenues to be in line with inflation or
better going forward absent policy action as its economy improves and
tax base growth continues as new projects are completed. Fitch also
expects that management will increase revenues as necessary to
supplement expenditure growth.
State statute limits annual increases in the tax levy to 4% above the
prior year’s levy while insulating the town from loss of revenues from
decreases in the property tax base. Certain exceptions exist in the law
to exceed the 4% limit but require a 4/5ths approval from the town’s
council, and in certain instances, the state auditor general. Debt
service costs are not restricted by this levy cap.
The fiscal 2017 budget was approved last month by residents and was up
$2.6 million or 3% from the prior year’s budget. The tax base increased
by 4.4% or $90.3 million and the property tax levy increased by $2.4
million, or 4% over fiscal 2016. Expenditure increases were tied to full
pension and OPEB funding, as well as a $1 million increase in school
funding and $0.6 million increase in debt service. The general
government budget was $4 million less than in fiscal 2016 due to a
reallocation of payroll taxes and benefit costs to the respective
The town’s largest general fund expenditure areas are related to
education and employee salary and benefit costs associated with public
safety. The general fund provides support to the school fund annually
through a transfer out representing approximately 48% of total fiscal
2015 general fund revenues of $65 million.
The town’s natural pace of spending is expected to remain above natural
revenue growth due primarily to the weakly funded pension plan and pent
up labor costs. Expenditure growth has been recently controlled due to
the local pension and OPEB reform efforts, implementation of long-term
employee contracts expiring in fiscal 2019, and stabilization of the
town’s school fund. Employees agreed to no salary increases over the
five-year contract period, but the contracts contain a wage opener
clause in years four and five depending on the financial position of the
Carrying costs related to debt and unfunded retiree benefit liabilities
(19% of government spending in fiscal 2015, with pension funding alone
equaling 12% of spending) are expected to remain elevated, but
manageable. Pensions are expected to be a continued spending pressure
due to low funded levels for both the town operated plan and the state
teachers’ plan. Town control over headcount, wages, benefits and work
rules is limited by staffing and labor contract requirements, including
minimum staffing requirements for police and firefighters, but
management can reduce non-public safety staff if necessary.
The town’s five-year plan to improve pension funding assumes additional
annual tax levy increases. Changes in the tax base, either positive or
negative, will influence the level of these tax increases.
West Warwick teachers participate in the state operated Employees’
Retirement System for teachers. Costs associated with the state
teachers’ plan are expected to grow as the plan is considered weakly
funded by Fitch.
The town’s unfunded OPEB liability as of June 30, 2014 was $58 million,
a large improvement from the $107 million valuation for June 30, 2011.
Due to recent healthcare plan reforms and increases in employee
contributions and newly required retiree contributions, the annual costs
and overall liability declined. The town established an OPEB trust in
fiscal 2015 with an initial investment of $240,000. It then deposited
$920,000 (1.4% of general fund spending) in fiscal 2016 and budgeted
$743,000 as a deposit to the trust for fiscal 2017.
After a period of contention and maintenance of a deficit position,
school fund performance continues to be positive due to better internal
spending controls and an increase in state school funding. The school
fund experienced net operating surpluses in fiscal 2014 and 2015 and had
$3.2 million in reserves (equal to 6% of school spending) available for
future school spending.
Long-Term Liability Burden
Total outstanding debt and unfunded pension liabilities represent a
moderate 18% of personal income. Overall net debt levels of $41 million
are low (3.4% of personal income and 1.9% of market value) and levels
are not expected to materially change due to manageable plans for future
debt and a rapid principal amortization rate of about 80% over 10 years.
The plan contributing the most to this liability is the town’s defined
benefit pension plan offered to all employees excluding teachers.
Management has made significant efforts to address its compounding
pension costs by successfully negotiating and implementing
court-approved reforms to the plan effective fiscal year 2015. Even with
these reforms, the pension plan is still severely underfunded as of July
1, 2015 at only about 20% (using Fitch’s 7% rate of return) and the
estimated Fitch-adjusted net pension liability is $130 million (11% of
personal income and 6% of market value). The combined unfunded pension
liabilities for the town plan and state teachers’ plan is an estimated
$170 million, based on a 7% rate of return (14.4% of personal income and
8% of market value).
The agreed upon reforms that were made with the town’s labor groups and
retirees were court approved in July 2014 and include suspension of
cost-of-living-adjustments (COLAs) for the next five fiscal years and
increased contribution rates for employees. The reforms resulted in a
reduction of the actuarially determined contribution (ADC) from $10.7
million to $8.1 million for fiscal 2015 and lowered the future annual
rate of growth in the ADC. The ADC for fiscal 2017 for the town’s plan
is $8.7 million.
The town is required to fully fund its pension ADC in accordance with
the court approved plan of reform. The ADC is projected to increase by
an average 3.5% annually over the next 20 years. The system is projected
to reach a still-weak 60% funded status by 2033 assuming the town’s 7.5%
investment rate and payment of 100% of the ADC in years 1-5 and 100.5%
of the ADC in years 6-20. The purpose of the higher ADC percentage in
these years is to meet the state’s requirement of emerging from critical
pension status (less than 60% funded) by fiscal year ending 2033.
West Warwick’s response to downturns comes from a combination of revenue
increases and cost controls that have resulted in a stabilization of its
operating budget and maintenance of moderate reserves. The impact of a
moderate economic decline scenario on revenues is likely to be limited
due to the fact that the town’s primary revenue source is property
taxes. The town has the legal ability to maintain (or increase by up to
4%) its tax levy even with a decline in taxable values and it has
historically demonstrated a history of maintaining its tax levy. The
“minimal” inherent budget flexibility assessment reflects the fact that
all budgets are subject to voter referendum, meaning that the town does
not have independent revenue raising flexibility. However, Fitch expects
that during an economic downturn management would address the shortfall
and maintain a moderate level of reserves through an increase in
revenues and expenditure management based on past performance and the
fundamental changes they have made to improve the town’s financial
The town’s financial operations were projected to become severely
strained following the downturn as a result of compounding pension
liabilities and growing OPEB costs. In addition, the town and school
department had an ongoing dispute over the town’s funding of school
operations resulting in an accumulated operating deficit for the school
fund. Management was successful in implementing both pension and OPEB
reforms for existing and retired employees helping to control the growth
in these costs and achieve stabilization of the budget. As indicated
above, the school fund has also rebounded and currently has a positive
fund balance with fiscal 2016 projections indicating another operating
surplus. Fitch would expect management to again take appropriate action
to maintain its financial resilience consistent with the current rating
For fiscal 2015, the town had a net operating deficit of $766,356 net of
pay-as-you-go capital spending. Results reflect mostly a decrease in
expected delinquent tax collections. The unrestricted fund balance of
$2.5 million represents a modest 3.7% of spending. Other available funds
of $2.05 million are available for budget flexibility and consist
primarily of capital funds that the town will spend down over time, and
unassigned special revenue funds.
Management projects relatively flat general fund operations for fiscal
2016 with a $200,000 budgeted surplus. The school fund is projecting a
$500,000 operating surplus due primarily to lower salary related costs
and lower than anticipated medical costs. Fitch expects unrestricted
general fund reserves to gradually be re-built over the course of the
five-year plan to a 5% of spending level.
Additional information is available at ‘www.fitchratings.com‘.
In addition to the sources of information identified in the applicable
criteria specified below, this action was informed by information from
Lumesis and InvestorTools.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
Dodd-Frank Rating Information Disclosure Form
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.
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
Kevin Dolan, +1-212-908-0538
33 Whitehall Street
New York, NY 10004
Maria Coritsidis, +1-212-908-0514
Laura Porter, +1-212-908-0575
Elizabeth Fogerty, New York, +1-212-908-0526