Fitch Ratings has upgraded to ‘BBB’ from ‘BBB-‘ Cranston’s outstanding general obligation bonds, the ratings agency announced Friday. The rating outlook is revised to positive from stable. This rating action affects the city’s approximately $39 million outstanding GO bonds not covered by the Cranston Qualified Bond Act.
Concurrently, Fitch affirms the ‘A+’ rating on the city’s outstanding $24.3 million qualified GO bonds issued pursuant to the act and payable directly by the state treasurer, subject to appropriation. The rating outlook on the qualified GO bonds is stable.
The rating upgrade is based on the city’s sustained improvements in financial operations following years of poor fiscal performance which culminated in general fund balance deficits in fiscal years 2001 and 2002. The fiscal turnaround is signaled by a steady increase in reserve levels and liquidity position in recent years.
Fiscal management is strong and should be enhanced by recently implemented financial management practices, Fitch said. Additional credit strengths stem from the city’s manageable capital needs and above-average wealth levels. Fitch’s key credit concerns center on the city’s severely underfunded public safety pension plan, although proactive actions have been undertaken to improve the plan’s funding progress.
Consistent with the positive rating outlook, the maintenance of existing credit strengths and the continuation of the city’s improved financial performance and flexibility will likely lead to upward rating movement over the next one to two years, Fitch said.
Cranston’s population gains have been steady to reach an estimated 2004 population of 81,966. Although a largely residential community, the city maintains a light industrial and commercial presence. Driven by residential and commercial development, the city recorded a notable 44 percent gain in tax base based on the December 2005 revaluation.
The city’s unemployment rate has historically tracked closely to the state’s and slightly below the nation’s. Wealth levels are above average by all measures.
Benefiting from much improved management, the fiscal 2005 audited financial statements were unqualified and released in a timely manner for the third consecutive year. Audited 2005 results indicate that the general fund balance reached 11.2 percent of total expenditures, compared to 9.7 percent for fiscal 2004.
The city maintains additional financial flexibility in other funds, including the budget stabilization and health care stabilization funds. The combined reserve levels in non-general funds rose a notable 25 percent during the year. Year-to-date results project surplus operations for fiscal 2006, and officials plan to continue to set aside reserves in various funds to provide additional financial flexibility.
The adopted budget for fiscal 2007 is balanced and incorporates assumptions that appear reasonable, Fitch said. Recently codified financial management practices should help enhance the city’s reporting transparency and safeguard its financial stability.
Cranston’s $220.6 million unfunded accrued liability in its closed pension plan, long a credit concern to Fitch, is being addressed. Following two consecutive years of contributing an additional $6 million above the pay-as-you-go amount in fiscals 2005 and 2006, the city will be contributing the actuarially required contribution starting in fiscal 2007, with the goal of fully funding the pension plan in 2032.
Although the city is committed to making annual contributions that are actuarially sound, it will take many years before any discernible progress in the funded ratio can be achieved, Fitch said. Currently, the funded ratio for the plan is severely low at 12.5 percent.
At $837 per capita and 1 percent of estimated full value, Cranston’s debt levels are moderate and should remain so given the city’s manageable capital needs. Despite an above-average principal amortization rate of 60 percent in 10 years, the debt service burden is affordable at 7.5 percent of total expenditures and transfers out, but the fixed cost burden will remain high given the annual pension payments over the long term.