PUBLIC FINANCE. Cranston, Rhode Island. US$6.74 mil GO BANs dtd 10/04/2007 due 10/02/2008. Short Term Rating SP-1+ New

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1 PUBLIC FINANCE Cranston, Rhode Island Primary Credit Analysts: Henry W Henderson Boston (1) henry_henderson@ standardandpoors.com Secondary Credit Analysts: Karl Jacob New York (1) karl_jacob@ standardandpoors.com Credit Profile US$6.74 mil GO BANs dtd 10/04/2007 due 10/02/2008 Short Term Rating SP-1+ New Ratings Detail >> Rationale Standard & Poor s Ratings Services assigned its SP-1+ rating on Cranston, R.I. s $6.7 million GO BANs and affirmed its A- rating on the City s existing long-term GO debt. The outlook is positive. The rating reflects the city s: Improved financial position in recent years; Strong property tax base growth, with above average per capita market value; and Average debt burden. Although Cranston has made significant strides in restoring fiscal balance, its very large $218 million unfunded police and fire pension plan liability remains a significant fixed cost and credit weakness. The bonds and notes are secured by the city s full faith pledge. RatingsDirect Publication Date Sept. 24, 2007 The city has maintained its improved financial position, continuing the strong trends following a deteriorated position that led to the rating being lowered to B in The city s new administration, in office since January, appears to remain focused on maintaining the

2 improvement in financial and management practices that were implemented under the prior administration, but were sorely lacking in prior years. The efforts of the prior administration, complemented to a degree by the advisory services of a state review board, not only helped the city restore structural balance but led to consecutive years of strong operating surpluses as well. Cranston is located just south of Providence, and covers an area of almost 30 square miles, stretching from Narragansett Bay in the east to Scituate in the west. The city s population of 81,614 as of the 2005 census, is the third largest in Rhode Island. The city s proximity to Providence, along with its own employment base, has helped it maintain unemployment rates around state and national averages. In fiscal 2006, unemployment stood at 5.1%, on par with the state s 5.1% rate, but above the U.S. average of 4.6%. Cranston s employment base has been slowly growing, even managing to add jobs during the recent recession. Approximately 29,000 jobs are located in the city, containing a mix of services, light manufacturing, retail, and distribution. The city s income levels are average, with median household effective buying income (EBI) of 105% of national average and per capita EBI of 99%. Fiscal 2006 ended with a general fund surplus of $333,000, which increased the unreserved general fund balance to $19.9 million, or 12% of general fund expenditures. This follows positive results in fiscals 2003, 2004 and 2005 when the city generated $7.1 million, $10.4 million and $3.5 million operating surpluses, respectively. The strong trend in reserves is in marked contrast to fiscals 2001 and 2002 when the city recorded undesignated fund balance deficits of $3.5 million and $1.4 million, respectively. Significant property tax increases since June 2003 (after years of no tax increases) and a large 35% sewer fee increase in fiscal 2003 have helped balance the revenue/expenditure mix, with collection rates conservatively budgeted. Management estimates a slight general fund surplus for fiscal The fiscal 2008 budget contained no appropriation of fund balance, but required a 5.25% tax levy increase, the maximum allowed under state law without an override. However, the school system projects it will end the year with a $4.3 million deficit: $1.1 million due to a shortfall in state revenues and $3.2 million of projected overspending. The system s stated corrective plan is to seek additional funding from the city, but no agreement has been reached. City management believes that negotiations may result in a smaller amount of additional funding for schools, and has identified some potential revenue sources, such as roughly $750,000 of unneeded contingency funding for a projected tax abatement that never received state approval, and revenue from the possible sale of an unoccupied police station, estimated at around $2.0 million. The city was able to include its full OPEB annual required contribution (ARC) of $3.5 million in the 2008 budget, but funded only 96% of the pension ARC, $19.9 million rather than the full $20.8 million. The city s financial management practices are considered standard under Standard & Poor s financial management assessment (FMA), indicating that the finance department maintains adequate policies in some but not all key areas. Cranston s overall net debt position excluding the unfunded pension liability - is average at $1,030 per capita and 1.0% of market value. However, when the unfunded pension liability is included as Standard & Poor s ANALYSIS 2

3 debt, the levels rise to $3,700 per capita and 3.5% of market value. The debt service carrying charge is below average at 4.3% of expenditures. Management has identified some large potential capital needs, including a fire station and renovations to some existing schools, but has no definite plan for when it might issue debt for these projects; however, overall net debt is projected to remain average. Outlook The outlook is positive. The city s strong improvement in financial position a result of solid management practices and policies was reflected in the upgrade in June The rating could be raised again if the recent history of sound fiscal management practices and structurally balanced financial results continues. Economy For fiscal 2008, assessed valuation (AV) was $8.63 billion, after a 53% increase in fiscal While much of the fiscal 2007 AV increase was due to a change in the ratio of AV to market value, estimated market value also increased, by 14%. Per capita market value is above average at $105,700. There is little tax base concentration, as the 10 leading taxpayers comprise just 5% of total assessed valuation. The tax base is primarily residential (73%) and commercial (18%). Significant development in the city includes the Chapel View project, a mixed use development with a plan for 470,000 square feet of retail, office, and residential construction. About 220,000 square feet is completed or nearly completed and nearly all leased. Thirty-three residential condominium units are projected for 100,000 square feet in the development. Pension/OPEB The town has multiple pension plans for its employees. City employees, except for police officers and firefighters hired before July 1, 1995 and teachers are included in the state Municipal Employees Retirement System. Teachers participate in the Rhode Island Retirement System. Police officers and firefighters hired before July 1, 1995 participate in a city-administered pension plan. As of June 30, 2006, the unfunded liability for the city s police and fire pension was $217.5 million, a 20% funded ratio. The OPEB liability for these employees was calculated to be $47.9 million. The town was able to include 100% funding for the OPEB ARC in the fiscal 2008 budget, but the funding for the pension system dropped to 96% of the ARC, from full funding in recent years. Statewide Levy Limit Rhode Island general laws section limits the increase in a city or town s tax levy. The limit was 5.25% for fiscal 2008, and will decrease by 0.25% each year until it reaches 4.0% for fiscal The law allows exceptions for debt service, as well as for the loss of nonproperty tax revenue, emergencies, and a substantial increase in the tax base requiring significant additional expenditures. Any increase in the levy in excess of these limits must be approved by at least four-fifths of the full governing body of the city or town, and if the city or town has financial town meeting, by a majority of the voters at the financial town meeting. Cranston s levy increase for fiscal 2008 was at the maximum allowed without an override. 3

4 FMA: Standard The city s financial management practices are considered standard under Standard & Poor s FMA, indicating that the finance department maintains adequate policies in some but not all key areas. The city maintains a strong practice of presenting budget monitoring reports to the mayor and city council on a monthly basis. The city also annually updates its five-year capital plan, although the plan does not identify funding sources for all projects. City management has an informal goal to maintain an unreserved general fund balance of between 5% and 10% of expenditures. Standard & Poor s ANALYSIS 4

5 Ratings Detail (As Of 24-Sep-2007) Cranston GO BANs dtd 10/04/2007 due 10/02/2008 Short Term Rating SP-1+ New Rating Cranston GO (AMBAC) Unenhanced Rating A-(SPUR)/Positive Affirmed Cranston GO (FGIC) Unenhanced Rating A-(SPUR)/Positive Affirmed Cranston GO (MBIA) Unenhanced Rating A-(SPUR)/Positive Affirmed Many issues are enhanced by bond insurance. 5

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