When Woonsocket, R.I., sold deficit notes last year, it came at a high price, but it brought benefits as well.

Unlike Central Falls, whose fiscal crisis prompted a change in Rhode Island law last year, Woonsocket has worked with the state to address its problems and last week fixed out its notes as short-term bonds.

Earlier this month, Fitch Ratings revised its outlook on Woonsocket's BBB-minus debt to stable from negative in anticipation of the bonds' pricing and implementation of measures to address the city's budget problems.

In April, Moody's Investors Service downgraded the city's debt to a junk-level Ba1 from Baa2 and placing it on review for downgrade. When the city sold its deficit bond anticipation notes in July, Moody's revised its outlook to stable. The agency affirmed that rating this month.

"Our change in the outlook basically reflects the fact that they were able to do their Bans, and management there has taken prudent steps to try to address some of the concerns and issues identified by the state," said Fitch analyst Ann Flynn.

The city's working relationship with its school district also appears to be improving. "The city is expecting the school district to live within their budget and not continuously come back to them," Flynn said.

Fitch changed the city's outlook to negative last year as it was working with the state on its short-term deficit borrowing.

"They did some deficit notes and our concern at that time was their ability to take out those with bonds and really be able to meet all of the thresholds set forth by the state," she said.

The city ended fiscal 2010 with an accumulated deficit of $12.2 million on revenues of $113.7 million and $190.3 million of general obligation bonds outstanding.

Woonsocket paid a high price for its $11.5 million short-term deficit borrowing last year. The deficit Bans priced on July 9, 2010, yielding 6.25% with an eight-month maturity, 592 basis points higher than the Municipal Market Data triple-A benchmark scale, according to Thomson Reuters.

Pricing information for the bond sale was not available on Friday. Woonsocket finance director Thomas Bruce said that Lord, Abbett & Co. had agreed to buy the entire offering, but added that he couldn't comment on it because that was still being finalized.

Finding a single buyer — Lord Abbett had also bought the majority of the deficit notes, according to Thomson Reuters eMaxx data — gave the city more certainty than having to find additional investors before the notes come due in March.

"We were in a critical state of having to make sure we were successful," Bruce said.

Morgan Keegan & Co. underwrote the deal.

First Southwest Co. was financial adviser on the deal and Edwards Angell Palmer & Dodge LLP was bond counsel.

The bonds were sold with serial maturities through 2016 and are subject to redemption under certain circumstances.

"The biggest problem the cities and towns have had in Rhode Island is the state's abandonment of programs designed to provide property tax relief to Rhode Island citizens," said Daniel Beardsley Jr., executive director of the Rhode Island League of Cities and Towns. "Any time a state shares its progressive revenue stream, sales and income tax, it relieves a state's overreliance on property taxes as a revenue stream for local governments."

Compounding the problem has been the fact that the state doesn't allow local governments other avenues to raise revenue, he said.

"There are no local option taxes such as sales tax or income tax — it limits amount of money cities can collect for licenses and fees," he said.

Aid to municipalities has fallen sharply since the recession began, state budget documents show. In fiscal 2009, state aid to cities and towns totaled $273.6 million. The last two budgets slashed aid sharply so that the current budget allocated just $78.2 million in fiscal 2011.

The economic downturn hit the state harder than many other spots in the country, with unemployment levels consistently near the top over the past two years. In December, Rhode Island's unemployment rate of 11.5% was the fourth-highest in the nation, according to the U.S. Bureau of Labor Statistics.

"The state had their own budget pressures and pushed some of those pressures down on cities and towns to some extent," said Moody's analyst Conor McEachem. "You've seen a loss of general revenue sharing and sharp decline of motor vehicle excise tax reimbursements, which was the other major source of aid to cities and towns."

The municipalities that have struggled more, such as Woonsocket, Pawtucket, Central Falls, and North Providence, historically had a vibrant manufacturing base.

"Those jobs were replaced by jobs that have shown to be more vulnerable in weaker economic periods such as this," McEachem said. Newer jobs tended to be in the service industry and small businesses, he said.

The municipalities that have weathered the storm better tended to be those that went into the recession in better shape, having maintained strong pension funding practices and strong financial practices, he said.

Woonsocket and North Providence, which issued $10.5 million of deficit bonds last year, had to get state approval to issue the bonds and agree to take measures to get their fiscal houses in order.

Other municipalities have also struggled with solutions as evidenced by the firing last week in Providence of the city's 1,926 public school teachers to help close a $40 million deficit. Teachers are expected to be rehired but it's unclear how many and on what terms. They also avoided the fate of Central Falls, which had its finances and governance taken over by a state-appointed receiver.

"What we did right was we listened to the state," said Woonsocket's Bruce, who joined the city government last year. The state set requirements for the city to return to structural balance.

It hasn't been easy. City officials had to cut $2.5 million of spending, which involved union concessions that included furloughs, wage freezes, and a workforce reduction of 50 people through layoffs and attrition. Teachers agreed to contribute to their health insurance costs and to make copayments for health care.

The city has also begun reporting its other post-employment benefits for the first time and adopted a change to its charter setting a reserve fund goal of 8% of revenues after the deficit bonds are repaid.

"All departments of the city have really worked hard in the past year to restructure and eliminate costs," Bruce said. "Also, the community has to go through a readjustment of its thinking and realize that the deficit-funding bond is one last chance to eliminate any structural budget deficiencies that exist."

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