June 10 West Warwick, Rhode Island, has avoided
falling into junk bond territory with voter approval of a budget
that includes plans to resolve the town's public pension crisis,
Fitch Ratings said on Tuesday.
Fitch rates West Warwick's general obligation bonds 'BBB-',
its lowest investment grade category. The rating agency had
warned that it could downgrade the town, but on Tuesday it
removed its negative watch and assigned a stable rating.
In late May, voters approved a budget that averted a state
takeover by hiking taxes and approving labor concessions, which
will help fund contributions to West Warwick's town-run
retirement system for firefighters, police and municipal
The state of Rhode Island enacted sweeping pension reforms
in 2011. That same year, one of its old textile mill cities,
Central Falls, went bankrupt largely because of unmanageable
bills for its nearly insolvent pension plans.
The state pension reforms didn't change funding plans or
lower long-term liabilities for the state's many independent
local pensions. They did, however, require cities and towns with
pensions funded below 60 percent to lay out recovery plans for
their funds and retiree healthcare systems.
After many years of underfunding, West Warwick's pension was
funded at 17 percent as of July 2013, an abysmally low level
compared to the 80 percent level that many consider the minimum
for a healthy fund.
The town's pension had unfunded liabilities of $128 million,
one and a half times as large as the town's annual budget of
about $86 million, according to Fitch.
To address the problem, the town drew up a five-year
negotiated deal with retirees and labor unions, who agreed to
steep cuts in benefits in part to avoid potentially bigger cuts
if the state took over town finances.
The deal takes effect July 1, the first day of fiscal 2015.
It calls for no salary increases for five years, unless the town
meets certain financial thresholds. It also suspends retirees'
cost of living adjustments for five years. The town also made
major changes to its health plans and negotiated higher employee
contributions, Fitch said.
Voters also agreed to take a hit, approving a 3.79 percent
tax levy increase.
West Warwick's budget passage "caps an impressive
collaborative effort of all affected parties," Fitch analysts
said in a May comment.
Even with the concessions, however, the town's budget will
be pressured and its pension will remain very poorly funded for
some time, Fitch said.
(Reporting by Hilary Russ in New York; Editing by Chizu