Fiscal Advisor Paul Luba Gives Final Advice to EP
Mayor James Briden asked Luba for forecast
At the August 21, 2018 City Council meeting, James A. Briden, Mayor & At-Large Councilman asked the state-appointed fiscal overseer, Paul Luba, to "memorialize events of the last five years" as a guide going forward for the soon to be new city council. "I've asked Paul Luba to put together a document to help prepare a new council on what lies ahead for East Providence," Briden told his colleagues. "In our most recent Audit Report for the Fiscal Year ending October 31, 2016, we were told that our City has implemented “Best Practices” in essentially all areas of Financial Management. These categories include a fully funded pension ARC, fully funded OPEB ARC, a fund balance policy, capital fund policy and a conservative budgeting and collection policy," said Briden. "We have a good financial situation now and we need to keep focus," added Briden. "Standard & Poor’s has upgraded the city’s Bond Rating to A. What will empower us as a city in the future is maintaining our financial strength. This will require that we continue to make careful decisions within the framework of continuously refined multi-year financial and capital budget plans," said Briden.
"A perfect storm of conditions took down East Providence but you bounced back," Luba told the council. 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. Now that the city has recovered, Luba had several suggestions to help maintain this status.
'TANS' or tax anticipation notes are a key to East Providence's financial health. TANS are loans issued to help finance current operations before tax revenues are received. When the city collects the taxes, the proceeds are then used to retire the debt. "Because you (city of East Providence) haven't synchronized the budget year, you need TANS. You need lenders to give you cash because you run out of money every June through May. The system works but you need the ability to get TANS. You need good bond ratings," said Luba. Luba then outlined several recommendations to help the city prevent a TANS crisis:
•"Know what to expect. This means that before each budget is passed, ask to see an updated five year forecast from the City and the School. No one likes forecasting and to be honest anything beyond 1 – 2 years isn’t very accurate but it gives you some idea what to expect going forward. Just talking about potential future problems is a good thing. It cushions blows and sometimes allows for more creative solutions. You've got to try to do this."
• "Keep in touch with the school department. Ask questions regularly, how are they (schools) doing, are they over or under budget. Schools are the biggest department and therefore the biggest part of your city budget."
• "The state aid to education formula must change. It is a big concern that the state is freezing aid to education. This must change, especially to help urban schools."
• "Care about where the School Department is going, and how they are doing. Intervene immediately if a problem is identified. If I had to identify the biggest weakness that I have found with City government, it is that the School Department usually does not receive much attention from the City until a financial problem arises, and then it takes an inordinately long period of time before any resolution is arrived at. Unresolved School Department deficits brought the Budget Commission to Woonsocket and East Providence."
• "Expect to do the fiscally necessary things. Work to expand the tax base as much as you can but realize that tax expansion will likely fall behind the rate of expenditure growth such as healthcare costs, pension expenses and wages. It is a balancing act but you cannot depend on new revenues to make things balance. New businesses usually carry tax stabilizations, and the full benefit of them coming into your City will not happen for years after they arrive (though you will get permit fee money). It may mean tax increases. In the last 5 years you have had very minimal tax increases. You must cut expenses or raise taxes. You cannot budget deficits. When times are good, the loans are there."
• "Keep reserves. Maintain the 12% combined restricted and unrestricted reserve balances in both good times and bad. This shows fiscal restraint to lenders, and actually lowers the amount of TANs you will need to borrow. If you use a reserve, plan to replenish it, even if it means raising taxes."
• "Fund your pension ARC (annual required contribution)."
• " Don’t let fiscal problems linger. Do what you have to do quickly. Things only get worse.
• "Adequately provide for capital. Older equipment does not age well. It won't get better, just older."
• "Expect the unexpected. Things happen you can't control. Pawtucket just lost a few million of future tax revenue, and Woonsocket lost a $1.6 million taxpayer hospital that went non-profit. Accounting errors occur, pension miscalculations happen. In the Warwick situation I believe they should have known a while ago that a significant budget shortfall was going to occur with their school budget (Warwick is running a significant school deficit)."
In conclusion, Luba told the council to "remember the perfect storm that took down East Providence. It can happen again. You will need to keep yourself sheltered by practicing sound fiscal policies," Luba added.
The appointment of a state budget commission in 2011 was not without controversy. Some in the city have always maintained that there were behind the scenes machinations by State House operatives with East Providence ties. "We were not in the same predicament as Woonsocket or Central Falls," said former City Manager Paul Lemont. The late City Manager did not approve of a state budget commission running the City. Former school officials maintained that underfunding required programs was a major cause of school deficit spending.
In a March, 2017 interview with the Reporter, Paul Luba said that the "city's problem had been building up since around 2000. "While the city was running a surplus, the school department was carrying an accumulated deficit of some $7.6 million," he recalled. At one point an unpaid bill for special education services payable to Bradley Hospital had reached $6 million. "Basically bills couldn't get paid and as the city's bond rating plummeted, there was no cash or ability to secure TANs," Luba said at that time.
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.
Paul Luba's appointment as Finance Adviser to East Providence is set to end this September. 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 has been part of every budget meeting the city has had over the past five years. While the state officially removed the budget commission from East Providence in March of 2013, many in the City are glad that Paul Luba has remained to advise and consult.