Moody's: Moody's upgrades Central Falls' (RI) GO rating to Ba3 from B1; outlook is stable

Global Credit Research - 23 Jun 2014

City has $8.7M of outstanding GO debt

New York, June 23, 2014 -- Moody's Investors Service has upgraded the City of Central Falls' (RI) general obligation rating to Ba3 from B1, affecting $8.7 million in outstanding general obligation bonds; the outlook has changed to stable from positive. Moody's has also affirmed the Ba1 underlying rating with a stable outlook on the Rhode Island Health and Educational Building Corporation's (RIHEBC) Series 2007B bonds, affecting $4.9 million in rated RIHEBC pooled debt.

 

SUMMARY RATINGS RATIONALE

The upgrade to Ba3 reflects the city's recent trend of favorable operating results following emergence from Chapter 9 bankruptcy in October of 2012 and transition to local control in April 2013 with an adopted six year bankruptcy plan which was accepted by a federal court. The bankruptcy process has significantly reduced the financial pressure related to growing employee salaries, pensions and healthcare insurance costs. The rating also incorporates Moody's expectation that the city has and will continue to make general obligation debt service payments, given the state law creating a priority lien for general obligation bondholders and the absence of challenges to the payments by other creditors. Despite the city's exit from bankruptcy, it continues to face significant challenges stemming from high fixed costs and years of deferred capital expenditures and projected weakness in revenue growth, including the loss of an annual Impact Fee payment and back taxes owed from the Wyatt Detention Center. The city also has a limited tax base characterized by weak socioeconomic indicators, including the highest poverty rate in the state, and an elevated debt burden.

The stable outlook reflects our expectation that the city's maintenance of structural balance will continue, in line with its bankruptcy plan and as reflected in its six-year financial projections. We also expect the city to continue to fund 100% of its pension ARC, resulting in an increasing funded ratio and a reduced unfunded pension liability for the city's single employer plan.

The underlying Ba1 rating and stable outlook assigned to RIHEBC's 2007B bonds incorporates Central Falls' underlying general obligation rating as well as the city's limited (6.6%) portion of the pooled debt. A significant amount of debt service (34.22% of the pool) is directly paid to RIHEBC by the State of Rhode Island (GO rated Aa2/negative outlook) and, in addition, the state can intercept additional aid for debt service, providing strong additional security. Additional factors incorporated in the RIHEBC rating are the strong mechanics, included in the RIHEBC pool agreement and historic state support for school construction projects. Proceeds from the 2007B bonds were originally loaned to the four participating units of government to fund various school capital improvement projects.

 

STRENGTHS

-Recent trend of stability in financial operations

-The city's successful exit from bankruptcy without significant challenges by creditors

-Transition to local control with adherence to a bankruptcy plan, which projects balanced budgets through 2017

- Reduced expenditures related to personnel costs and benefits

- Continued oversight of financial operations pursuant to the state Fiscal Stability Act

 

CHALLENGES

-Limited tax base and weak demographic profile

-Large unfunded pension liability, despite significant reductions

-Reduced levels of state aid and a statutory property tax levy limitation

-Elevated debt burden with a significant amount of deferred capital projects

 

OUTLOOK

The stable outlook reflects our expectation that the city's maintenance of structural balance will continue, in line with its bankruptcy plan and as reflected in its six-year financial projections. We also expect the city to continue to fund 100% of its pension ARC, resulting in an increasing funded ratio and a reduced unfunded pension liability for the city's single employer plan.

 

WHAT COULD MAKE THE RATING GO UP:

-Adherence to the six year financial plan and improvements in the financial reserves

-Improved funding for the city's pension, OPEB and maintenance of capital

-Significant decrease in debt burden

 

WHAT COULD MAKE THE RATING GO DOWN:

-Deviation from the six-year financial plan that results in financial deterioration

-Inability to improve funding of long-term liabilities including pension and health care

-Significant increases in debt burden or pension liability

 

e principal methodology used in this rating was US Local Government General Obligation Debt published in January 2014. An additional methodology used in this rating was Public Sector Pool Financings published in July 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

 

 

REGULATORY DISCLOSURES

 

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

 

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vito Galluccio
Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Thomas Bradford Compton
Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653


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