Moody's Investors Service said it has upgraded the city of Central Falls, R.I.'s general obligation rating to B2 from Caa1, and revised the outlook to positive, affecting $14.7 million in outstanding general obligation bonds.


Concurrently, Moody's has also affirmed the city's Ba1 underlying rating and stable outlook on the Rhode Island Health and Educational Building Corporation's (RIHEBC) Series 2007B bonds, affecting $1.3 million in rated RIHEBC debt.

The upgrade to B2 reflects the city's successful emergence from Chapter 9 bankruptcy following the adoption of a bankruptcy plan in federal court.

The bankruptcy process has resulted in a significant reduction in the financial pressure related to employee salaries, pensions and healthcare.

The rating also incorporates Moody's expectation that the city will continue to make general obligation debt service payments, given the state law creating a priority lien for general obligation bondholders and the absence of challenges to the payments by other creditors. Despite the city's exit from bankruptcy, it continues to face significant challenges to restoring financial stability, including budgetary pressure from growing expenditures and projected weak revenue growth, including the recent loss of an annual PILOT payment from the Wyatt Detention Center.

The city also has a limited and declining tax base characterized by weak socioeconomic indicators, including the highest poverty rate in the state, and an elevated debt burden.

The positive outlook reflects Moody's expectation that the city's finances will continue to maintain structural balance, in line with the bankruptcy plan and reflected in its six-year financial projections. Moody's also expects the city to continue to fund 100% of its pension ARC, resulting in strengthening funded ratios and reducing the city's unfunded pension liability.

The Ba1 rating and stable outlook assigned to RIHEBC's 2007B bonds incorporates Central Falls' underlying general obligation rating as well as the city's limited (6.6%) portion of the pooled debt. A significant amount of debt service (34.22% of the pool) is directly paid to RIHEBC by the State of Rhode Island's (GO rated Aa2/negative outlook) and, in addition, the state can intercept additional aid for the remainder of the participants' debt service, providing strong additional security.

Additional factors incorporated in the RIHEBC rating are the strong mechanics, included in the RIHEBC pool agreement and historic state support for school construction projects. Proceeds from the 2007B bonds were originally loaned to the four participating units of government to fund various school capital improvement projects.

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