From Despair to Success: How Did EP Bounce Back?
A Conversation With Paul Luba, Finance Adviser:
In approximately six years the City of East Providence has boldly gone from financial bleakness to a coveted "AA" bond rating. The higher a municipality's bond issue is, the lower interest it gets charged for loans and bonds to manage budgets and build schools or other bond-related projects. It can mean millions of tax dollars saved. There are only two higher bond rating levels, AA+ and AAA. Rating agency Standard & Poor ( S&P) rarely assigns those highest ratings to cities and towns. East Providence has jumped three levels recently from A to AA. S&P describes an AA rating as "an obligor with a very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree."
In a press release in early March, 2017, S&P said that, "S&P Global Ratings raised its rating on East Providence, R.I's general obligation (GO) debt three notches, to 'AA' from 'A'. The outlook is stable. The raised rating reflects our opinion of the city's improved management conditions, which have led to consistently strong budgetary performance and increases in available reserves over the past three years to very strong levels, coupled with the city maintaining a strong economy," - S&P Global Ratings credit analyst Anthony Polanco.
The city's full faith and credit pledge secures the bonds and notes. "We understand that proceeds of the notes will be used to meet city cash flow needs between April and July of 2017," Mr. Polanco added. The city issues tax anticipation notes (TANs) annually to fund its seasonal cash flow needs since it collects the majority of its property tax revenues by July 31, three months before the end of its fiscal year, on Oct. 31. "Tax collections are strong averaging 96% over the past three years. The notes are payable on July 27, 2017."
In October of 2013, S&P raised its unenhanced rating on East Providence's general obligation (GO) debt to 'A' from 'BB+'. "The outlook is stable. The higher rating is based on our recently released local GO criteria, as well as the city's improving financial performance and liquidity position and lower long-term pension liabilities," said S&P's credit analyst Victor Medeiros. "In addition, the city has significantly bolstered financial management controls following the state's implementation of a budget commission. While the budget commission has since been relieved of its duties, we believe there remains strong active state oversight that will translate into East Providence maintaining stable budgetary performance. We believe its departure will test the city's ability to manage on its own over the next several years," said the S&P opinion. "The stable outlook reflects the city's focus on rebuilding its operating flexibility and its enhanced financial management controls," added Mr. Medeiros. "We believe East Providence's improved budgetary outlook is likely to translate into stronger available reserves, particularly as the economy rebounds and new development projects gain traction," added Medeiros.
So just how did East Providence navigate from "Junk Bond" or Non-Investment Grade (also known as speculative-grade) status, where they couldn't secure any loans or funding, to its current "Investment" status at AA. The Reporter held a one-on-one interview with one of the key players behind the scenes in East Providence's climb out of a deep money pit to its present day status as financially secure. Financial Advisor Paul Luba is the lone holdover from the state-appointed budget commission, which was appointed by former Governor Lincoln Chafee in 2011. Chafee and state Department of Revenue Director Rosemary Booth Gallogly appointed an East Providence Budget Commission charged with fixing East Providence's budget mess. The city's bond rating was downgraded to three notches below an investment grade.
"When you can no longer get TANs or loans, you can't pay your bills," said Paul Luba. "In 2011, that was the case in EP. There was a serious cash problem. Not being able to pay your bills is generally viewed by financial institutions and the rest of the world as one step before bankruptcy. In general, municipalities were making financial institutions very nervous, and East Providence finally had to pay the price for its long-standing accumulated School deficit," said Luba.
The appointment of a state budget commission was not without controversy, Some in the city have always maintained that there was behind the scenes "string pulling" by State House operatives with East Providence ties. "We were not in the same predicament as Woonsocket or Central Falls," said a source and former city official. "The schools were underfunded. There was an ability to pay for education."
On November 14, 2011, Major Stephen Bannon of the RI State Police was appointed Fiscal Overseer for the City under the Fiscal Stability Act of 2010. After an investigation of the city's finances, Bannon reported to the state Department of Revenue that "I have concluded that the City (1) is unable to present a balanced municipal budget; 2) faces a fiscal crisis that poses an imminent danger to the safety of the citizens of the City and/or their property; and (3) will not achieve fiscal stability without the assistance of a budget commission. Therefore, it is my belief that a budget commission should be appointed."
On December 20, 2011, Governor Chafee announced the appointment of a Budget Commission, citing a School Deficit of $7.2 million; a Moody’s downgrade three notches to below investment grade; and the City’s difficulty in obtaining short-term financing.
Asked how the state was able to seemingly do what city officials could not do, Finance Overseer Luba replied that, "the Budget Commission had the power of ordinance and law. They could reorganize, eliminate jobs, cut salaries. Retiree benefits were reduced and employee contracts could be set without negotiations."
Luba believes, as did the budget commission, that the root of the city's financial woes began with school deficit funding. "This problem had been building up since around 2000," said Luba. While the city was running a surplus, the school department was carrying an accumulated deficit of some $7.6 million. At one point an unpaid bill for special education services payable to Bradley Hospital had reached $6 million. "The teacher contract was a culprit. There were no co-shares." Basically bills couldn't get paid and as the city's bond rating plummeted, there was no cash or ability to secure TANs.
Various school officials say they were helpless to stop the bleeding. They cite unfunded state mandates and the cost of some expensive special educational spending needs that were beyond local control. School officials also decry what they saw as a lack of providing funds for necessary school upgrades through the years. "We warned every year at budget time, of the dangers in not properly funding our schools."
"It wasn't popular but the budget commission came in with the authority to fix things. They had the tools to fix things which the city lacked," said Luba. Red flags were going up in financial rating circles as the city was seeking more loans in anticipation of tax receipts. Luba pointed out how the bulk of the city's tax receipts come in during June of the fiscal year.
Luba looked back at financial audits for the city and described the following accumulated surpluses/deficits since 2009: In 2009 the city carried a $3,206,988 million surplus and the school budget deficit was a $6.2 million. It morphed to a 2011 city surplus of $7.5 million and school deficit of $7.6 million. "I believe that the School deficit that had been steadily increasing since 2000 had spooked the financial bond ratings services, namely Moody’s and Standard and Poor’s. Without TANs, East Providence would find it hard to meet operating costs from December and January through May, until the majority of its tax revenue came in during June and July," said Luba.
By 2012, the city was able to transfer surplus dollars to the school budget and zero out the department’s deficit. But what else had to happen, Luba was asked.
"Basically a 'Perfect Storm' of good financial news happened," Luba replied. "The economy got better everywhere, an increased education aid formula infused the district with $1M to $1.5M more, East Providence was the first in Rhode Island to benefit from a new tax offset policy (for past due balances), consolidation of city-school services began (although most have now ended) and the city was more aggressive in collecting taxes owed (currently the city is owed close to $2M in delinquent water bills). Employee contract cuts and other belt-tightening measures were also cited as part of the process of climbing out of a big financial hole.
While the city was getting back to solvency, East Providence teachers felt that they were bearing an unfair burden in the budgetary comeback. Throughout this entire process East Providence teachers, generally in the middle of the pack statewide for salaries, had now been cast as among the lowest paid in New England. Coaches stipends had been slashed 60% and teacher morale sank to an all-time low. Some left for other jobs, some retired early if they could but the majority stayed put and had to "grin and bear it."
The budget commission recommended ending all middle school sports and the district's all-day kindergarten program among other cuts. Oldham School was shuttered. Hundreds of protesters converged on a budget commission meeting at City Hall in February, 2012. Most were students but many parents were also involved. After being told the meeting was private, the group assembled outside a City Hall window where the commission was meeting. Their loud chants were met by a police response. Protesters were allowed to stay as long as streets were not disrupted.
Former Mayor Bruce Rogers often clashed with then commission chairman Michael O'Keefe. After telling protesters they could attend the commission meeting as it was being moved to the larger council chambers, the protesters applauded loudly. The protesters were allowed to speak and Rogers and O'Keefe continued to differ. "I will strongly support not eliminating middle school sports. I know how much time and effort all of your coaches give back. They are tremendous role models for you," said Rogers. Rogers told O'Keefe, that regarding their differences, "I'll bring my A game." "Bring it on," retorted O'Keefe. After a couple years of no middle school sports, they were eventually reinstated. "But a lot of damage was done," said a school administrative source. "Many good students left the system to enroll elsewhere, for a more comprehensive and well-rounded education."
Luba also remarked on the frequency of City Manager changes in the city. "This probably didn't help things. I think former Manager Bill Fazioli was right in predicting that 'continued deficit spending in the school department is bad.' "Bill did a good job," offered Luba.
The biggest helping hand may have come from the so-called Google Award. Looming on the horizon in the deficit years was a largely unfunded police and fire pension fund. The fund had been borrowed from by prior city managements to help with budgeting. The system, only 30% funded, was set to bust. Step in Google. Google was found liable for allowing online Canadian pharmacies to place advertisements through its advertising program targeting consumers in the United States, resulting in the unlawful importation of controlled and non-controlled prescription drugs into the United States. East Providence Police assisted in the investigation along with North Providence and the RI State Police. In the massive court settlement, East Providence received $60M cash. Some $49M was allowed to go into the police pension system with the rest going for the purchase of a new fleet of vehicles and equipment. The money could not be used for any other purpose. "$8M is still left and sits within the Department of Justice for future police department use," said Luba. "Yes, the Google settlement benefited the city greatly. The local budget had about a $10M total savings."
Currently the City appears to be in good shape. The city is hiring, some new positions have been created, school buildings have been getting repaired and there is no longer talk of budget deficits. There is even talk of building a new high school. Acting City Manager, Tim Chapman recently told the city council that the City upgrade to an AA bond rating is great news. "I congratulate the City Council and our Director of Finance, Malcolm Moore, all staff and our state Fiance Overseer, Paul Luba." Chapman and City officials tout the "economic development in the city which has been attracting solid business investment for this improved bond level." Mayor Jim Briden also made a point to say "it is noteworthy that these good things happened during the previous City Council's term."
Luba warns of storm clouds in the near future. "Although things are pretty good right now, the City has several potential hurdles it will soon face," he said. "The 'rainy day fund' is fully funded at 10% of the budget or about $10M. It can't be used for anything other than a big shortfall in state funding or state aid problems. It can't be used to replace a school boiler, for example." Luba cautions that the city must hope that a freeze in state aid to education doesn't happen. "If the school state funding formula were to freeze, then all school improvements, etc., must come directly from the school budget. "Everything has consequences."
Luba is concerned that every single employment contract in the city is up for renewal this year. "All of them, at once. It won't be easy, it is very hard to relinquish something you already have. If revenue and state aid drops, that's a big problem. Since the budget commission left, councils have levied zero or very low tax increases. Even at the 4% cap for a tax increase, it will be difficult to fund everything," added Luba. One group of union employees most likely not in a mood to give back major concessions is the teachers. They've only recently regained some ground on what they feel were very unfair salary, benefit and retirement losses. In a matter of time, city officials will know if another "Budget Perfect Storm" is looming. This one on the negative side.
Paul Luba's appointment as Finance Adviser to East Providence will end in September of 2018. He is also advising the City of Woonsocket. Luba's salary and benefit package for both jobs is at $120,000. The state contributes $60,000 and East Providence's share is $30,000. Luba is part of every budget meeting the city has and is also in attendance at the newly named Charter Commission meetings. The state law governing Luba's appointment as Financial Adviser gives him sweeping powers. His appointment letter states in part, "Monitor and oversee all financial operations and activities including the city's or town's operating and capital financial plans to maintain fiscal stability..."
Luba's involvement has been seen as a positive one by many city budget watchdogs. "I see myself as having the power of persuasion and advice," Luba said. "I approve the budget process, yes, but I think we're all working well together. I think I have helped the situation.
The former budget commission wasn't free to the city as originally advertised. Since arriving in East Providence on December 11, 2011, the budget commission strongly asserted to city residents that they were here at "no cost to the taxpayers". Former chairman Michael O'Keefe, often told anyone who asked, "we are here at no cost to you. We are already on the state payroll and are just loaned to this effort."
However The Reporter had disclosed that the budget commission billed the city council for $245,339 at one point for their service. That matter was not discussed at any prior meeting. At that time of The Reporter's revelation, the city was billed for the period of December, 2011 through October 31, 2012. "The money was not budgeted, it just came from the city's general fund," said a commissioner staffer. The payment was confirmed by Chairman Michael O'Keefe. When reminded that he often told people that the commission was not costing East Providence "one dime", O'Keefe relented and acknowledged the payment. "Well, the state decided that the effort was more than expected," said O'Keefe. Asked if he was surprised by this, O'Keefe said "Well, yes, I was a bit surprised." Upon hearing the news of the "surprise" cost for having the budget commission in the city, one middle school protester asked the commission, "why don't you cut your pay like our coaches and teachers had to." There was no reply to the student's query.
The state officially removed the budget commission from East Providence in March of 2013.