June 10, 2014 / 7:55 PM / 4 years ago

West Warwick, R.I., avoids junk bond status with pension fix

June 10 (Reuters) - 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 employees.

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 Nomiyama)

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