November 30, 2012 / 9:36 PM / in 5 years

TEXT-Fitch affirms Pawtucket, R.I. GOs at 'BBB-'

Nov 30 - Fitch Ratings affirms the following City of Pawtucket, Rhode
Island's (the city) outstanding general obligation (GO) bonds:

$5.2 million, GO bonds, series 2001 at 'BBB-';
$1.8 million, GO refunding bonds, series 2002B at 'BBB-';
$9.9 million, GO bonds, series 2005 at 'BBB-'.

The Rating Outlook is Stable.

The bonds are an unlimited tax general obligation of the city backed by its full
faith and credit.


WEAK FINANCIALS; PROJECTED IMPROVEMENT: Tax increases coupled with departmental
cost savings has helped stabilize city operations after deficit results in four
of the last five years. Fitch views management projections for current positive
general fund operating results and gradual improvement in reserves as reasonable
given its effectiveness in cost cutting, efficiencies gained through attrition,
and revenue improvement.

implemented a plan to eliminate its cumulative deficit over the next four years
but Fitch remains skeptical given historical setbacks. The city's audit shows
positive fiscal 2011 school operating results negated by a projected fiscal 2012
deficit. Progress in balancing school operations is dependent on the accelerated
payments of the state school funding formula as well as increased city
contributions; a divergence from the deficit reduction plan will likely stall
city general fund progress.

WEAK LIQUIDITY: The city's liquidity, although expected to improve, remains low
requiring the continued usage of tax anticipation notes (TANs) to supplement
cash flow.

WILLINGNESS TO RAISE REVENUES: The city has shown a willingness to raise
revenues, in one year above the statewide tax cap, in an effort to stabilize
financial operations at both the city and the school.

LARGE UNFUNDED BENEFIT LIABILITIES: The city's unfunded pension and other
post-employment benefit (OPEB) liabilities are very high, but important to the
rating is the city's progress in meeting its pension annual required
contributions (ARC). Meaningful progress in funding levels will likely need to
come with labor concessions and/or state legislation, the likelihood of which is

LOW DEBT LEVELS: The city's debt levels are low and are expected to remain
manageable even with future planned debt issuances.

BELOW-AVERAGE SOCIO ECONOMIC INDICATORS: Wealth levels are relatively low and
the city's unemployment rate exceeds state and national averages.


The city, with a population of 71,148, is located just north of the capital city
of Providence and 40 miles from Boston.

The $3.6 billion tax base is primarily residential but declined 17% with the
recent three year revaluation effective Dec. 31, 2011. The tax base has declined
30% since fiscal 2009 due primarily to lower real estate values, but management
has adjusted tax rates upward to remain revenue neutral.
The largest employers are Memorial Hospital, Gateway Healthcare and Hasbro, the
toy manufacturer, which maintains its headquarters in the city. The former mill
town has seen a conversion of mills into residential condos and small retail
businesses. Future residential housing development is slated for the next two
years based on recent city approvals of plans which should help boost property
tax revenues.

The city's wealth levels have historically been below state and national
averages and unemployment rates continue to exceed the state and nation. Despite
a slight uptick in employment and workforce participation in September 2012, the
city's unemployment rate was 12.4% compared to 13.1% the year prior and above
the state rate of 9.8%.

The city experienced significant declines in reserves the last five years due to
a combination of cuts in state aid, increased employee costs and recessionary
conditions pressuring non-tax revenues. In fiscal 2011, the state removed a bulk
of the motor vehicle reimbursement to local governments resulting in a $9.8
million (9%) structural imbalance. The city responded by lowering the motor
vehicle exemption by about one-half and increasing the tax levy to just below
the 4.5% maximum state-mandated total tax levy increase.

Fiscal 2011 midyear spending cuts and one-time transfers of reserves from other
funds totaling roughly 3.5% of revenues, helped reduce the deficit further.
Fiscal 2011 ended with a $1.4 million draw on reserves resulting in a low
unrestricted general fund balance totaling 2.3% of spending.

In fiscal 2012, no new property tax increase was levied but the motor vehicle
exemption was reduced from $3,400 to the state minimum of $500 resulting in $3.7
million of additional motor vehicle tax revenues. Officials approved an $876,000
appropriation towards fund balance and if successful, management's projection
for a $1.89 million budgetary surplus would increase total fund balance to 4.8%
of general fund spending. Supporting the projected positive results were
revenues ahead of budget by $500,000 and lower expenses due to the
administration's decision to privatize the city's waste transfer station,
employee attrition and cuts in fire department spending.

The fiscal 2013 budget prudently included a 3% property tax increase, another
year of not budgeting the use of fund balance and no one-time transfers. The
budget includes a $500,000 appropriation to increase fund balance. According to
management, the budget is tracking as expected with some savings realized due to
some employee retirements.

Fitch remains concerned that the apparent progress in the city's general fund
could be stalled if school deficit elimination benchmarks are not met. Historic
overspending and aggressive budgeting thwarted budget balancing solutions
despite a willingness by the city to raise taxes to support school operations.
The cumulative deficit stands at $2.7 million (2.7% of fiscal 2011 school
spending) and both the city and state auditor general have approved a plan to
eliminate the gap by fiscal 2016. Successful implementation relies both on
closer expense management by the school and increased funding from the city.

The original school fund deficit for fiscal 2012 stood at $8.9 million due
primarily to decreases in overall city funding and federal funding. Management
reduced staffing by 22 positions, froze salaries for both fiscal 2012 and 2013
and continued reducing expenditures to help partially offset the imbalance. The
projected school fund operating deficit for fiscal 2012 is $2 million (2% of

For fiscal 2013, the state restored $3 million in school funding and accelerated
an additional $1 million in school aid. As a result, school officials expect an
operating surplus of $1.5 million for fiscal year end which if realized would
help partially eliminate the fiscal 2012 deficit. City management expects the
phase in of increased state funding for schools and other cost savings measures
to continue to help stabilize school operations over the longer term. The risk
associated with slow progress towards balanced operations is incorporated into
the low 'BBB-' rating.

The city's debt levels are low with overall debt to market value at 1.4% and
debt per capita at $726. GO debt amortization is above-average with 73% of par
retired in 10 years. To accommodate cash flow needs the city resorted to the use
of tax anticipation notes (TANs) beginning in fiscal 2010 and issued TANs in
February 2012 in the amount of $12.6 million, up from $11.6 million in fiscal
2011. The TANs were paid off in July 30, 2012. Management has indicated to Fitch
its need for TANs still exists due to the timing of tax collections but as
another indication of slight improvement, the borrowing level should be lower.

The city issued $8.3 million in bond anticipation notes (BANs) on August 22,
2012 (not rated by Fitch) and plans to take out the BANs with a $12.3 million GO
bond issue in fiscal 2014. To help fund planned capital improvements, future BAN
issues in the amounts of $4 million, $7 million and $10 million are planned for
fiscal years 2015, 2016 and 2017 respectively. Such issuances are not expected
to materially increase debt ratios due to the phase in of the new debt over time
and rapid amortization rate of existing debt. Debt service costs in fiscal 2011
were a manageable 6% of spending.

Fitch recognizes a certain level of market access risk associated with the
city's reliance on short term financing (BANs and TANs) given the low rating
level. Importantly, the city reports no issues to date in subscriptions to
short-term debt offerings.

The city-run pension has an unfunded liability of $149 million, or 34% funded,
as of July 1, 2011, up from 30% the prior year and assuming the city's 7.875%
investment rate. Using Fitch's more conservative 7% rate the funding level is
31%. The city has increased its contributions to meet 100% of the ARC starting
in fiscal 2012. Contracts with the city's major bargaining units expired June
30, 2012 and the city plans to seek potential concessions which could help
reduce its estimated future liability. No salary increases were included in the
fiscal 2013 budget.

The city makes pay-as-you-go payments for its other post-employment benefits
(OPEB) obligations. The unfunded OPEB liability as of July 1, 2009 is a very
large $378 million using a 4.25% discount rate. The next OPEB actuarial
valuation as of July 1, 2011 is nearing completion, according to city officials.
The city and school fund contributed $12.5 million towards its OPEB costs (52%
of the ARC) in fiscal 2011, 7% of total city and school spending.

Fiscal 2011 carrying costs for debt service, pensions and OPEB paygo are a high
to moderate 20% of city general fund and school fund expenditures.

Additional information is available at ''. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported
Rating Criteria, this action was additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index,
IHS Global Insight,, National Association of Realtors, and Stone
Consulting, Inc. (city's pension actuary).

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria

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