Fitch Removes Cranston, RI 'BB-' GO Rtg from Neg Watch; Assigns Positive Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 15, 2003

Fitch Ratings removes the Rating Watch Negative on Cranston, RI's (the city) 'BB-' general obligation (GO) bond rating and assigns a Positive Rating Outlook. The rating action affects approximately $75 million in outstanding

Poor budgeting, planning, and disclosure, as well as a large unfunded pension liability, has weakened Cranston's financial position over the last three years, leading to a $1.4 million general fund cumulative deficit, as of June 30, 2002. Fitch assigned the Negative Rating Watch in December 2002 due to ongoing delays by state and city officials to stabilize the city's rapidly declining financial position, and concerns the city might default on its bond anticipation notes (BANs) due in February 2003.

The removal of Rating Watch Negative and assignment of Positive Rating Outlook reflects the fact that these notes were subsequently repaid on time after the passage of the Cranston Qualified Bond Act (see below), and a fiscal recovery plan is in the process of being implemented, that is likely to improve the city's long-term credit.

Under the plan, a finance review board was created comprised of city and state officials and chaired by the Auditor General. The finance review board monitors city finances through monthly and quarterly reports mandated for all cities under a new state law. Another pertinent aspect of the plan is the creation of a supplemental property tax to eliminate accumulated deficits in the internal service funds. The tax was levied in January 2003 and the city reports receiving $12.6 million by the close of fiscal June 2003 year-end (not yet audited). The tax will exist in perpetuity. Finally the city has adopted a plan to fund over the next 40 years its police and fire pension program. As of November 2003, the pensions were only 8.2% funded. The city has also eliminated recurring costs associated with a 1996 ordinance that increased retirees' annual benefits whenever increased benefits were negotiated by current employees.

The city currently has $27.9 million outstanding in qualified BANs issued under the Cranston Qualified Bond Act which was signed into law by the governor on Feb. 5, 2003. Passage of the act was critical in allowing Cranston to rollover its BANs that came due Feb. 12, 2003. The act permits the city to apply for approval to issue qualified GO bonds, which are payable directly by the state treasurer from certain state aid moneys otherwise payable to the city. The city's full faith and credit also would be pledged to the qualified debt. The BANs are rated 'F1+' by Fitch, and the city has already applied for a qualified bond issue expected in January 2004.