NEW YORK--(BUSINESS WIRE)--In the course of routine surveillance, Fitch Ratings affirms the 'BBB' rating on the town of West Warwick, Rhode Island's (the town's) approximately $18.9 million in outstanding general obligation (GO) bonds. The Rating Outlook is revised to Negative from Stable.The 'BBB' rating reflects the town's below-average economic indicators, a limited employment base, and severely underfunded pension system. Credit strengths include a low debt burden and fairly limited capital needs. Also incorporated in the 'BBB' rating is the effect of a state-wide property tax cap that greatly limits annual levy growth and resultant limited financial flexibility. A deteriorating housing market continues to largely offset steady tax base growth of recent years. Data on mortgage performance for the town, provided by LoanPerformance, show foreclosure rates in West Warwick above the national average. The Outlook revision to Negative from Stable reflects heightened stress on financial operations due to further deterioration of both general government and school operating performance in fiscal 2009 and the high likelihood of reductions in state aid, which totaled 37% of general fund expenditures and transfers out in fiscal 2007. With revenue pressure from the tax cap and potential state aid reductions, future financial flexibility is contingent upon spending curtailment, which is extremely challenging given the current school deficit combined with a high and rising labor fixed cost burden.
The town recently settled a Caruolo Act lawsuit with the schools, in which the town assumed a $1.1 million liability for outstanding school bills in exchange for increased communication with school officials and the opportunity to discuss labor contract re-negotiations. Current projections show a $4 million deficit in school financial operations for fiscal 2009, and officials will be examining all aspects of school operations over the next year as they look to address the shortfall. West Warwick continues to be exposed to fluctuations in intergovernmental revenues as state support for local governments and school districts is expected to be cut mid-year in fiscal 2009. For fiscal 2007, the town reported a $1.6 million general fund deficit, partially reflecting the planned use of reserves, bringing the unreserved balance down to a still ample 8%. While audited results are not yet available, the general fund balance for fiscal 2008 is expected to show a further decline of $1.8 million, resulting from the planned use of reserves and other capital costs. The liability related to the Caruolo settlement and associated legal fees, coupled with cost overruns from River Walk and the Civic Center and projected school operations deficits are expected to further reduce reserve levels in fiscal 2009. Additionally, the town will also need to address deferred capital needs and long-term financing of a $6 million legal settlement for the night club fire in 2003.
The town of West Warwick is a small community of approximately 29,000 located 11 miles south of Providence, Rhode Island (state GO bonds rated 'AA-', Stable Outlook, by Fitch). Wealth levels are below average relative to the state and nation, and unemployment rates are high. The town's unemployment rate of 9.3% for August 2008 was higher than the state's 8.8% and notably above the nation's 6.1%.
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