OREANDA-NEWS. Fitch Ratings has upgraded the rating on the following city of Woonsocket RI's (the city) outstanding general obligation (GO) bonds:

--\$102 million GO bonds to 'BB-' from 'B'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are general obligations of the city and are backed by its full faith and credit and unlimited taxing power.

KEY RATING DRIVERS

UPGRADE REFLECTS FINANCIAL STABILIZATION: The city's significant progress in stabilizing its very weak finances is evidenced by operating surpluses and improved liquidity. The city faces ongoing fiscal pressure driven by a weak but improving economy and limited financial flexibility. The Positive Outlook reflects an expectation that the city will address these challenges, with a resulting trend of continued financial improvement, including balanced operations and improved liquidity.

CITY BENEFITS FROM CONTINUED STATE ADVISORY ASSISTANCE: The city benefitted from state oversight via a budget commission in addressing severe fiscal challenges in recent years. While the budget commission disbanded in March 2015, returning financial control to the city, a state-appointed finance advisor will remain in place for five years.

WEAK ECONOMIC INDICATORS: City unemployment levels are above state and national averages. Personal income levels are below average.

HIGH DEBT AND RETIREE COSTS: Debt levels are above average. Total carrying costs for pensions, OPEB, and debt service are high.

RATING SENSITIVITIES

CONTINUED IMPROVEMENT IN FINANCES: An ongoing trend of financial improvement, including balanced operations with continued full funding of required pension contributions, improved ending balances, and decreased reliance on interfund borrowing, could lead to an improvement in the rating.

CREDIT PROFILE

Woonsocket is located 15 miles outside of the capital city of Providence. The city's population of about 41,000 in 2013 declined by 5% since 2000, but has remained flat in recent years.

LONGER-TERM FINANCIAL CHALLENGES

The city faces ongoing financial challenges, with improved, but still weak fund balances, narrow liquidity, and a heavy debt and pension burden. However, Fitch believes that budget commission oversight has led to more effective fiscal management, which is expected to continue, aided by a state-appointed finance advisor. The city's revenue-raising flexibility is limited due to a statutory annual tax cap levy of 4% over the prior year's levy. The city has been able to exceed the tax cap in certain years with city council and state legislative approval, but there is no assurance this would be consistently approved.

The city faces pending legal and tax challenges which could negatively affect finances. A suit filed by a group representing police department retirees challenges certain retiree savings initiatives implemented as part of the multi-year deficit reduction plan. The city currently estimates that an adverse ruling would result in a \$400,000 liability to the city. A property tax appeal related to WP Woonsocket Associates, LLC, owners of a shopping center, is still pending. The company, one of the city's top taxpayers (1% of taxable assessed value (TAV) in fiscal 2014 or about \$500,000 in tax revenue), is challenging its valuation as overstated.

CONTINUED FINANCIAL IMPROVEMENT UNDER MULTI-YEAR DEFICIT REDUCTION PLAN

In 2013, the city, with the assistance of a state appointed budget commission, developed a multi-year plan to reduce and ultimately eliminate a total cumulative school and city fund negative balance of \$7.1 million (-5.1% of combined spending). At the end of fiscal 2012, the general fund had a \$2.6 million balance (3.7% of spending) and the school fund had a negative balance of \$9.8 million (-14.2%). Major components of the plan involved state legislative approval and union negotiations, and included health and pension-related savings initiatives and a \$2.5 million supplemental property tax bill. The plan initially expected to eliminate the cumulative deficit by fiscal 2017. With better than budget performance, current estimates indicate positive ending balances for both general and school funds for fiscal 2015.

Fiscal 2014 results, particularly for the school fund, were better than estimates. The fiscal 2014 combined unrestricted general and school fund ending balance was \$56,000 (after \$2.9 million transfers to capital funds), compared to -\$1.2 million projected a year ago. Better performance resulted from salaries and benefits costs coming in under budget due to unfilled positions and reduced expenditures for staffing, supplies, and equipment. Current estimates for fiscal 2015 indicate surplus operations resulting in a combined general and school fund unrestricted ending balance of \$2.9 million. The combined balance consists of an unrestricted general fund balance of \$2.5 million and an unrestricted school fund balance of \$372,000.

The fiscal 2016 budget assumes a general fund surplus of \$687,000 and balanced operations for the school fund. General fund budgeted revenues for fiscal 2016 increase by 2.5% compared to the fiscal 2015 budget, chiefly driven by a budgeted 3.04% tax levy increase. School fund revenue growth (3.7%) is due to increased state funding allocations. Fiscal 2016 general fund budgeted expenditure growth (1.7%) is driven by increased public safety overtime costs, including a \$400,000 contingency appropriation for these, and growth in health insurance costs. School spending grows by about 3.7%, reflecting increased staffing and equipment needs.

The current multi-year plan, which runs through fiscal 2020, indicates balanced operations, with modest operating surpluses in fiscal years 2017 through 2019. The plan assumes annual tax levy increases of 2.74% and continued full funding of pension ARC payments, which historically had been significantly underfunded.

IMPROVED LIQUIDITY; NO STATE AID ADVANCES EXPECTED FOR FISCAL 2016

In recent years, city cash flow has been strained, requiring interfund borrowing, state aid advances, and property tax pre-payment for stabilization. The city also has a history of deferring vendor payments. In fiscal 2013, the state advanced \$12.4 million in school aid to July from April through June payments. In addition, the city benefitted from a prepayment by CVS Corporation (the city's largest taxpayer) in June 2013 of its \$2.8 million fiscal 2014 property tax bill. The state again advanced school aid in fiscal 2014 (\$12.8 million) to July from April through June payments. The city also relied on interfund borrowing (\$2 million) and deferred vendor payments (\$2.8 million vs. \$7 million in fiscal 2013) to stabilize cash flows. Fiscal 2015 cash flows relied on a lower state aid advance (\$8.9 million to July from May and June payments) and \$2 million in interfund borrowing.

For fiscal 2016, projected cash flows assume no state aid advance and no deferred vendor payments. However, interfund borrowing of \$4 million may be necessary in July (when significant debt service payments are due), to avoid a potential mid-July deficit related to timing of actual receipt of property tax collections. Borrowing is anticipated to be made from available balances in a city sewer/wastewater fund (about \$7 million available). In addition, there is about \$1 million available for borrowing in the city capital fund. The June 2016 ending cash balance is estimated at about \$8.8 million.

WEAK SOCIOECONOMIC INDICATORS

The city's unemployment rate has declined, but continues to be elevated at 8.8% for March 2015, compared to 6.9% for the state and 5.6% for the nation. Employment grew by 1.1% in 2014, and March 2015 year-over-year figures show continued growth of 2.2%. The city's poverty rate (25.8%) is very high relative to state (13.6%) and national (15.4%) averages and city income levels are below average. Per capita money income (\$21,088) is about 69% and 75% of state and national averages, respectively.

Woonsocket benefits from the presence of CVS Caremark Corporation, which maintains its headquarters in the city. CVS is the city's largest employer (about 3,000 workers), and the largest taxpayer, making up about 6.5% of the city's TAV.

HIGH DEBT LEVELS

Overall fiscal 2014 debt ratios are generally high, net of debt service reimbursements on the city's public school revenue bonds issued by the Rhode Island Health and Education Building Corporation. Debt-to-market value is 5.9% and debt per capita is more mid-range at \$2,711. Annual debt service as a percentage of governmental spending was a high 13.9% in fiscal 2014. The city has no near-term debt issuance plans apart from potential refunding of outstanding bonds for debt service savings. The fiscal 2016 budget includes about \$500,000 in pay-go spending, primarily on road work. A portion of the fiscal 2014 surplus was dedicated to capital spending, in part to address deferred capital needs. Pressure to address deferred capital spending will likely continue in the near term.

CITY PENSION FUNDED LEVELS ARE WEAK

The city-administered police and fire pension plan is funded at a low 61%, assuming a 7.5% rate of return, with an unfunded liability of \$31 million at July 1, 2014 or 1.6% of market value. The funded ratio declines to an estimated 58% using a Fitch-adjusted 7% rate of return. Prior to fiscal 2014, the city had historically underfunded the ARC for the city-administered pension plan. As part of its multi-year plan, the city funded 100% of the \$3.5 million ARC in fiscal years 2014 and 2015, and has budgeted 100% funding for fiscal 2016. Total pension ARC, OPEB pay-go and debt service payments were high at about 25% of fiscal 2014 governmental spending.

General employees, police hired after July 1, 1980, and firefighters hired after July 1, 1985 participate in plans under the Municipal Employees Retirement System, an agent multi-employer defined benefit system administered by the state of Rhode Island. Assuming a 7.0% rate of return, the various plan funded levels are at 88.4%, 67.1%, and 92.9%, respectively as of June 30, 2014. School personnel participate in the Employees' Retirement System of the State of Rhode Island, a cost sharing multi-employer defined benefit plan funded at 55.1% as of June 30, 2014 (assuming a 7.0% rate of return). Costs associated with the state teachers' plan are expected to grow, as the plan is considered weakly funded by Fitch. The city is required to contribute to the state plans based on actuarially computed amounts, and has historically made 100% of its required contributions.