The City of Providence, RI: A Case Examining the Financial Condition of a U.S. Municipality

INTRODUCTION

The economic recession and financial crisis of 2008 had a dramatic impact on the financial position of government entities, particularly at the state and local levels. There are numerous articles in the popular press and media stories of clashes between state governments and their citizens, and cities and towns on the verge of bankruptcy and, in some extreme cases, going bankrupt. This case is designed to enable you to learn firsthand about the challenges government entities face by performing an in-depth study and analysis of the financial condition of a medium-sized cityProvidence, RIwhich is currently facing significant financial challenges. Through this analysis you will deepen your understanding of governmental accounting issues and better understand the public interest complexities that occur in decision making for governmental entities.

BACKGROUND

City of Providence Overview

The city of Providence, Rhode Island was founded in 1638 by Roger Williams, who fled religious persecution in Massachusetts and started a settlement based on religious and political freedom (GoProvidence.com 2012). Providence is a medium-sized city, ranking 134th of U.S. cities in terms of size (Citymayors.com 2013), with a population of 178,042 based on the 2010 U.S. census (United States Census Bureau 2010). Mayor Angel Taveras, the 37th mayor and first Latino mayor of Providence, began serving in January 2011 (Smith 2011). Due to its easy accessibility by water, Providence has a rich history as a major world seaport; but it has also been vulnerable to hurricanes, experiencing devastating effects from the great New England Hurricane of 1938 and Hurricane Carol in 1954. In the late 1970s the citys infrastructure was greatly enhanced, and in the 1990s two major rivers running through the city were uncovered and moved, adding a pleasing aesthetic aspect to the city. As a result of the major improvements to the infrastructure, as well as significant building projects in the 1990s and the first decade of the 21st century, the city has experienced a cultural revival and has been successful in attracting visitors to its world-renowned restaurants and cultural events, particularly Waterfire, an event that occurs over numerous weekends in the summer and early fall. Cultural institutions include the Tony award-winning Trinity Repertory Company and Providence Performing Arts Center. Providence is also home to a number of colleges that lend an academic and innovative air to the city including Brown University, Providence College, Rhode Island College, the Rhode Island School of Design (RISD) and Johnson & Wales University (JWU). The prominence of RISD has led to growth in the Providence arts scene, and JWUs culinary school has fueled the growth and national reputation of the Providence restaurant scene (GoProvidence.com 2012).

The Providence Economy

Manufacturing was the predominant industry in Providence from the 1830s until the 1980s, with the production of textiles, light metals, and jewelry being most prevalent. The textile industry saw a sharp decline in the late 1920s, as companies in the northern states faced increasing competition from those in the south, and therefore jewelry and light metal manufacturing grew to be the dominant manufacturing sectors during the middle part of the 20th century. However, after World War II, Providence saw a big decline in population and many of the large manufacturing companies left the city for the suburbs. By 1970, four of the five largest companies with a strong manufacturing presence during the industrial revolution of the 1800s had left the city, and only Gorham Silver remained. Other companies, such as Speidel, Federal Products, and Imperial Knife, were also present but were not as dominant as their earlier counterparts. During this time service industries, such as financial, educational, and health services, were beginning to overtake manufacturing as growth industries (Conley and Campbell 2012). Today, the largest companies in the city include Textron, a large manufacturing and financing conglomerate, which bought Gorham and Speidel in the late 1960s/early 1970s (Textron 2012), and GTECH, a manufacturer of lottery machines and provider of lottery and gaming solutions (GTECH Corporation 2012). Although both companies have their corporate headquarters in Providence, their manufacturing facilities are located elsewhere. Providence has been positioning itself at the forefront of the Knowledge Economy, and has attempted to attract companies to the city in industries such as technology and healthcare, which focus on innovation. In keeping with this strategy, a district of the city once known as the Jewelry District, which housed the major jewelry manufacturers, has been transformed into the knowledge District, with the new location of the Brown University Medical School (Brown University 2011) and an IBM grant in 2011 of $400,000 to encourage innovation (Official Website of the City of Providence Rhode Island 2011). In 2011, Providence ranked 110 of the top 200 largest U.S. cities for job growth according to the Milken Institute (Milken Institute 2011).

Current Economic Challenges

Despite the investment in infrastructure and growth of cultural opportunities during the first decade of the 21st century, Providence has faced significant challenges, many associated with the downturn in the real estate market nationwide and the financial crisis of 2008. Unemployment during the economic downturn has been higher in Providence than in other parts of the country. For example, while the national unemployment rate in 2011 was 9 percent, the unemployment rate in Providence was 11.2 percent (U.S. Department of Labor 2012). In addition, because many of the business in the city, such as colleges and hospitals, are not-for-profit entities and therefore not subject to property taxes, the city has had to forgo property tax revenues from these entities. The not-for-profit entities have all agreed to make payments in lieu of taxes (known as PILOT), which when combined with state of RI, PILOT Payments total over $29 million per year (Commission to Study Tax Exempt Institutions 2010). Although this amount seems generous, a report generated by a commission of the Providence City Council estimates that if these entities paid the same tax rates as for-profit organizations, the total tax revenue would be over $82 million per year (i.e., over $53 million per year more than the PILOT payments) (Commission to Study Tax Exempt Institutions 2010). In addition, the city was dealt a blow in the failure of a new Knowledge Economy company when the 38 Studios video game company, started by Curt Schilling (former pitcher for the Boston Red Sox), defaulted on state loans and went bankrupt resulting in hundreds of lost jobs in 2012 (Stanton 2012); Kain 2012). Also in 2012, both Fitch and Moodys downgraded the credit rating of the city of Providence, limiting the citys ability to raise additional funds through borrowing (McGowan 2012; Thomson/Reuters 2012).

CASE DESCRIPTION

Assume you are recent graduates of a business program and have been hired for a budgeting/accounting position in the Director of Administration office for the city of Providence, RI. You are excited about this position for a variety of reasons. First, significant responsibility is associated with this position, and you will be a key individual in both the administration office and the mayors staff. Your specific responsibilities include working on the development of the citys budget and financial statements, along with providing financial information to other members of the mayors office. Like many cities in the United States, Providence has some financial challenges involving both sources of revenues (nobody likes paying higher taxes!) and expenditures associated with city operations, including costs related to public safety (police and firefighters) and the education system. It is your first week on the job and to orient you to your new position, your supervisor has given you the following assignment. In approaching this assignment, you want to do an excellent case analysis to make a favorable first impression.

REQUIEMENTS

Please use the Comprehensive Annual Financial Reports (CAFRs) of the city of Providence from 2011 to 2013 (see Attached). More specifically, use the basic financial statements found on pages 12-22 of the financial section of each CAFR. Answer the following questions using your knowledge of Governmental Accounting and the information in the CAFR.

Part I A. Background Questions/General Knowledge of Accounting for Municipalities

1) Typically, which branch of the city level of government structure is responsible for managing the citys expenditures within the budget and maintaining the accounting, budget, and financial reporting systems? What financial reports does a municipality need to prepare? What standards guide the preparation of municipal financial reports? Municipalities use the modified accrual basis of accounting. How does this differ from accrual accounting?

2) In the city of Providence, who is responsible for developing the budget? How is the budget voted on and implemented?

3) Review the Letters of Transmittal for 2011-2013 (pp. i-x for 2011 and 2012; pp. i-vii for 2013), write a brief summary of recent events that are related to the city of Providence and its financial condition. B. Preliminary Analysis of the City of Providence CAFR

4) Find the total assets, total liabilities, net assets, unrestricted net assets, total revenues, total expenses, and change in net assets of the city of Providence for 2011, 2012 and 2013. Explain the trends.

5) Calculate the current ratio and the debt ratio for 2011, 2012, and 2013. How is the city of Providences 2013 performance on these measures relative to 2011 and 2012?