State Cash Advance to East Providence, Rhode Island Is Credit Positive

State Cash Advance to East Providence, Rhode Island Is Credit Positive

Last Wednesday, the governor of Rhode Island signed into law a bill authorizing the advance payment of education aid to distressed local governments, and on Friday the state sent $12.6 million to the city of East Providence (Ba1 review for downgrade), which had been scheduled for disbursement in April. The advance is credit positive for East Providence because it will reduce dependence on interim cash flow borrowing, which has added additional costs and risks to the city’s strained finances. The law is also credit positive for Rhode Island local governments in general, as it creates a new mechanism for the state to provide relief to severely distressed local governments.

The City of East Providence has struggled with increasingly strained liquidity as its finances and economy have deteriorated. In November 2011, the start of its fiscal year, East Providence management estimated that it would need approximately $30 million in additional cash flow borrowing to operate until the spring state aid disbursement. The city issued a $10 million six-month note in December, costing $195,000 in interest. The advance of state education aid is not a loan and the city will have to reimburse the state $13,000 for lost interest on the cash, a significantly lower amount than what the city would likely pay in interest costs on a $12.6 million bond. The advance is expected to provide the city with sufficient cash through April, at which time there will still be a projected $7.4 million cash flow shortfall. The city may need to access additional cash flow borrowing at that time to continue to operate until the majority of its property taxes are received in June.

Exhibit 1 highlights the City of East Providence’s annual cash shortfalls since 2007, which have typically been alleviated through tax anticipation notes. The city’s irregular fiscal year (ending October 31) and the fact that it receives state aid in two lump sums instead of monthly have contributed to its volatile cash fluctuations more than other cities throughout the state. Although the advance helps solve the city’s intra-year liquidity problem, it does not increase the city’s overall annual revenues or address its longer-term financial pressures. The School Unrestricted Fund, the city’s primary driver of its fiscal imbalance, had an estimated accumulated deficit of negative $7.2 million, or a negative 25% of school fund revenues at the end of fiscal 2011.

East Providence Rhode Island Cash Shortfalls

In addition to its specific benefit to East Providence, the new legislation creates an additional tool for the state to assist distressed local governments under state oversight. The state may now advance appropriated aid to municipalities that are under the second level of the state’s oversight program, a category that currently includes only East Providence. The program’s three levels provide intensifying oversight as a municipality moves into further distress. Central Falls (Caa1 negative) is currently in the third level and under the control of a state-appointed receiver. The second level of oversight includes the governor’s appointment of a five-member budget review commission, which is empowered to amend budgets, reorganize staffing levels and departments, and issue deficit bonds. With the passage of this legislation, the budget commission may request the state advance funds to manage near-term cash flow issues, allowing distressed local governments additional time to find solutions to budget gaps and longer-term liquidity issues.