East Providence’s debt structure, ability to borrow are in good stead
Presentation on city’s finances also includes look at fiscal year synchronization
EAST PROVIDENCE — Five years after state intervention was deemed necessary, East Providence’s finances are on fine footing, its overall debt limited and its ability to borrow, if needed, likely as good as its ever been.
That was sentiment expressed by state appointed Municipal Finance Advisor Paul Luba and city Finance Director Malcolm during a presentation made to the council at its Tuesday, April 18, meeting.
Mr. Moore provided an outline of the city’s current financial state, telling the audience East Providence, as a whole, is at the moment carrying debts in the amount of $36 million. Some $21.2 million of that total comes from the school department, monies it has used in recent years to maintain the district’s ailing infrastructure. The remaining $14.8 million is on the city side.
Per state law, municipalities can only accrue debts at a percentage of their overall value. In the case of East Providence, it currently has a debt capacity of $120 million, meaning the city could borrow up to $84 million more if it were necessary to do so.
In his remarks on the topic, Mr. Luba cautioned, of course, that “all debt has a cost.” He used three scenarios to explain. If the city took out a 20-year bond for $25 million at 4 percent interest, it would cost $11.5 million in interest with annual payments of $1.8 million. A 25-year bond for the same amount and interest rate would cost $39.8 million over the life of the lone at $1.6 million per year. The most cost effective way to borrow the same number at the same interest level would be a 15-year bond, which would require $33.5 million with payments of $2.2 million annually.
Mr. Luba credited Mr. Moore’s office, current and past councils as well as acting manager Tim Chapman and his predecessors with steering East Providence’s finances well since the state appointed Budget Commission, which was seated in December of 2011, returned oversight to the city in September of 2013.
He referred to East Providence’s impressive bond ratings, A2 by Moody’s and AA by Standard & Poors, as the reason why the city could borrow from such a strong position. Mr. Luba said current interest rates were also beneficial, though he cautioned the Federal Reserve has indicated it would likely raise rates in the near term.
The April 18 discussion on debt included a detailed look as the pros and cons of synchronizing East Providence’s fiscal year budget with that of the state.
Right now, the city and Scituate are the only two municipalities in Rhode Island that do not follow the state’s fiscal calendar: July 1 to June 30. East Providence’s fiscal years begin on November 1 and run through October 31.
Mr. Luba debunked one of the long-held theories of why East Providence does not adhere to the customary calendar, which is the city knows exactly what it will receive in state aid by the time it puts together its yearly financial outline.
According to his research, Mr. Luba said state budgets for the most part hold true to the “first-look” documents produced by the governor’s office annually in January or February, meaning what municipalities expect to receive and actually do get in state aid once the General Assembly signs off on the budget holds relatively true to form.
The most obvious and pressing reason why East Providence would want to change its fiscal year would be to alleviate the need to borrow money each year to fill an annual cash flow shortfall. The city does so in the form of TANs or Tax Anticipatory Notes.
In a normal fiscal year, East Providence is required to borrow roughly $20 million in TANs to pay its bills. This action takes place in the second quarter of the city’s fiscal year long after it receives its aid from the state and after it collects the bulk of its tax revenues from residents in June and July. The city usually pays about $200,000 in interest to borrow the necessary funds.
One way how to synchronize with the state would be to borrow, which would likely cost East Providence about $40 million in TANs because in the fiscal year it did so it would only have three quarters of revenue. A few years ago, a synchronization fund was created by administrators and councils. Currently there is about $2.6 million in the fund. The last council opted not to contribute to the fund for FY2016-17, instead providing over $1 million for salary raises to employees in various departments.
Mr. Luba said ideally the city would like to have some $20 million in the fund before borrowing the remainder to allow for synchronization. He said at the moment, however, there is no rush to synchronize because of the relatively low interest rates.That, though, could change again as rates rise.
Market forces and the city’s debt structure play crucial roles in East Providence’s ability to borrow. He noted it was difficult for the city to access TANs during and following the financial crisis of 2008. How the state and other municipalities are performing also affects East Providence’s ability to borrow as does the willingness of financial institutions to lend.
“(East Providence) is not in a vacuum,” Mr. Luba said. “When things are going good, it’s easy not to look at the down side.”