Central Falls credit upgraded to one notch below ‘investment grade’

CENTRAL FALLS – Citing stable operations and positive financial performance since its bankruptcy in 2012, Moody’s Investors Service upgraded Central Falls credit rating to one notch below investment grade.

The global rating agency on Tuesday upgraded the city’s general obligation bonds from Ba2 to Ba1, which is still considered high-yield, or “junk,” but an overall improvement, to one level below investment grade.

Moody’s also revised the city’s credit outlook from “stable” to “positive.”

The new rating is significant for the state’s smallest city, which has worked to shore up its balance sheet since entering bankruptcy under a pile of unfunded liabilities and debt in 2012.

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“The upgrade … reflects a multiyear trend of stable operating results and continued positive performance relative to the post-bankruptcy plan since the city’s emergence from Chapter 9 bankruptcy in 2012,” according to Moody’s.

One of the prime reasons the city filed for bankruptcy was because of its unfunded liabilities related to pension and other post-employment benefits. The rating continues to consider those fixed costs, along with debt-related expenses, which combined, totaled 30 percent of the city’s entire spending budget last fiscal year.

In fiscal 2016, the unfunded liabilities for the city’s police and fire pension plan totaled $24.9 million, and was funded at 24.2 percent, according to the R.I. Division of Municipal Finance.

Anything below 60 percent funded is considered in critical status, but the numbers are improving for Central Falls, which a year earlier reported unfunded liabilities totaling $25.2 million, and funding at 21.7 percent.

“The city’s willingness and ability to continue to adequately fund this plan to achieve long-term sustainability will be a key component to future reviews,” according to Moody’s.

Central Falls other post-employment benefits costs, mostly related to health care, totaled $6.5 million as of fiscal 2016 thanks largely to the restructuring of deals through its bankruptcy. But it still only contributed about 49 percent of what it was supposed to in fiscal 2016, which is common practice among most municipalities that use “pay-as-you-go” systems.

Moody’s says the city is making some effort to prepay its future liabilities, and has earmarked $100,000 for its OPEB trust.

The rating agency cited the city’s commitment to its bankruptcy recovery plan and improved reserves in fiscal 2018 as examples of how Central Falls is strengthening its credit.

The city’s operating revenue has grown from $18.6 million in 2012 to $19.4 million in 2016, according to Moody’s.

But the agency warned about its limited tax base, weak resident wealth and income levels and constrained expenditure and revenue flexibility as continued challenges.

“Resident wealth and income remain weak and will likely limit and will likely limit revenue growth,” according to the rating.

The city’s 2015 median household income totaled $29,108, according to U.S. Census Bureau, marking the lowest level of any municipality in the state.

Moody’s noted the city’s credit could be upgraded again if it sustains its fund balance and maintains its structural balance, while also reducing its long-term liabilities and growing its tax base.

The rating could fall again if post-employment liabilities and debt expenses grow, and if the city’s tax base or other economic indicators weaken.

Central Falls Mayor James A. Diossa told Providence Business News he was happy with the upgraded rating.

“We are very happy with the work we’ve done and having agencies validate that with their comments and reports is very encouraging for me and my team,” he said.

Correction: An earlier version of this story misstated the bond rating for Central Falls.

Eli Sherman is a PBN staff writer.