Accounting Report

ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 30, No. 2 DOI: 10.2308/iace-51042 2015 pp. 127–139

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

Municipality

Christine E. Earley, Nancy Chun Feng, and Patrick T. Kelly

ABSTRACT: This case is intended for use in a wide variety of learning contexts, including undergraduate and graduate government and not-for-profit accounting

courses, advanced accounting courses, public policy courses, along with courses that

address municipal pensions at the college or university level, or other training programs.

The case achieves four primary objectives: developing proficiency in ratio analyses for a

municipality, conducting research related to the financial status of a municipality,

improving critical thinking and problem-solving skills, and developing an awareness of

potential public interest issues facing municipal leaders. We find that students benefit

from analyzing the financial condition of the City of Providence, RI and develop critical

thinking skills through their analyses.

Keywords: government accounting; municipality; financial distress; ratio analysis; pensions.

INTRODUCTION

T he 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. We have developed this case to enable students to learn firsthand about the

challenges government entities face by having students perform an in-depth study and analysis of the

financial condition of a medium-sized city—Providence, RI—which is currently facing significant

financial challenges. Through this analysis students will deepen their understanding of governmental

Christine E. Earley is a Professor at Providence College, Nancy Chun Feng is an Assistant Professor at Suffolk University, and Patrick T. Kelly is an Associate Professor at Providence College.

We thank the editor, the associate editor, and anonymous reviewers for their helpful comments throughout the review process. We also acknowledge Sara Merritt for her assistance with the review of the case and for providing support materials, and Cassandra Rohland, Suzanne Lowensohn, and participants of the 2013 American Accounting Association Public Interest Midyear Meeting for their comments on previous drafts.

Supplemental materials can be accessed by clicking the links in Appendix A.

Published Online: January 2015

127

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 city’s 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 JWU’s 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

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128 Earley, Feng, and Kelly

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 at 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

businesses 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 property 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 Moody’s downgraded

the credit rating of the city of Providence, limiting the city’s ability to raise additional funds through

borrowing (McGowan 2012; Thomson/Reuters 2012).

CASE DESCRIPTION

Assume you are a recent graduate 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 mayor’s

staff. Your specific responsibilities include working on the development of the city’s budget and

financial statements, along with providing financial information to other members of the mayor’s

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.

REQUIREMENTS

Please use the Comprehensive Annual Financial Reports (CAFRs) of the city of Providence

from 2011 to 2013 (see Appendix A). More specifically, the financial statements in the CAFRs for

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City of Providence, RI: A Case Examining the Financial Condition of a U.S. Municipality 129

2011 to 2013 are on pages 12 to 22 in each year’s CAFR. For example, on pages 12–13 in all three

years of reports, you will find the Statement of Net Assets and the Statement of Activities for both

Government Activities and Business-type Activities. Pages 14–22 provide more specific

information on Government Funds, Proprietary Funds, and Fiduciary Funds. Search for articles

about the city of Providence from 2011 to the present in the library databases such as LexisNexis

and popular media outlets like the Wall Street Journal. Answer the following case questions using the CAFRs and the articles that you have found.

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 city’s 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) Using articles from LexisNexis or other business media, along with 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

Providence’s 2013 performance on these measures relative to 2011 and 2012?

Part II: Additional Analysis of the CAFR

(6 ) Discuss the financial performance of the city over the last three years. Pay attention to

specific items from the Financial Statements that reflect the city’s performance.

(7) An article by Trussel and Patrick (2009) titled ‘‘A Predictive Model of Fiscal Distress in

Local Governments’’ summarizes the ways to measure fiscal distress and related financial

risk factors of municipalities.

a. Trussel and Patrick (2009, 590) define the condition of fiscal distress ‘‘as a local

government that experiences a significant and persistent imbalance between revenues

and expenditures.’’ Trussel and Patrick ‘‘operationalize the definition of fiscal distress as

a local government that experiences three consecutive years of operating deficits (scaled

by total revenues) with a cumulative three-year operating deficit of more than 5

percent.’’ By reading the three-year financial statements of the city of Providence, do

you think the city is experiencing fiscal distress? Explain how you derive your

conclusion regarding the city’s financial condition.

b. Trussel and Patrick (2009) identify risk factors or indicators of fiscal distress and use the

risk factors to develop a model to predict the likelihood of fiscal distress. They use the

following risk factors or indicators of fiscal distress: revenue concentration, administrative

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130 Earley, Feng, and Kelly

expenditures, debt usage, and entity resources. The definitions and measurements of these

factors are listed in the following table (Trussel and Patrick 2009):

Risk Factor Measure Expected Relation with Fiscal Distress

Taxes to Revenues Tax Revenues

Total Revenues þ

Inter-Governmental Revenues Revenues from Federal and State

Total Revenues þ

Administrative Cost Ratio Administrative Expenses

Total Expenses �

Debt Level ln(Total Liabilities) þ

Debt to Revenue Total Liabilities Total Revenues

þ

Size lnðTotal AssetsÞ �

Revenue Growth Total Revenuest�Total Revenuest�1

Total Revenuest�1 �

Calculate three risk ratios suggested by Trussel and Patrick (2009) for the city of Providence for

2011, 2012, and 2013, and report your findings. Use charts or graphs to support your points.

(8) City of Providence officials considered a number of ideas to mitigate the financial

pressures facing the city, including reducing the education budget and instituting an

income tax for the city of Providence. Comment on these ideas.

(9) The 2011–2013 Letters of Transmittal ( pp. i–x for 2011 and 2012; pp. i–vii for 2013)

described a number of actions taken to avoid the fiscal crisis facing the city. Given your

understanding of these Letters and the Financial Statements, how would you assess the

effectiveness of the actions taken in 2011 (e.g., did they improve Providence’s financial

position and permit a more sustainable fiscal approach for the city)? What are the short-

and long-term implications of the cost saving initiatives? Will the initiatives provide long-

term solutions to the city’s problems?

(10) Given your answer to Question 9, what fiscal and operational challenges does Providence

face in the next few years? What else should the city of Providence do to achieve financial

and operational success?

Part III: Analysis of Pension and Other Post-Employment Benefit Costs

(11) Find the annual pension cost, pension contributions made, net pension obligation, and

actuarial accrued liabilities of the city of Providence as reported in the 2011, 2012, and

2013 CAFRs. How well does the city of Providence fund its Employees’ Retirement

System (ERS) for 2011, 2012, and 2013? (Hint: the annual pension cost, pension

contributions made, and net pension obligation for all three years are listed in the 2013

financial statement footnotes.)

(12) The city’s annual other Post-Employment Benefit (OPEB) cost is calculated based on the

annual required contribution of the employer, an amount actuarially determined in

accordance with the provisions of GASB Statement 45. Find the annual OPEB cost,

contributions made, and net OPEB obligations of the city of Providence for 2011, 2012,

and 2013. How well does the city of Providence fund its OPEB?

(13) GASB No. 68, Accounting and Financial Reporting for Pensions (GASB 2012) is effective for fiscal years beginning after June 15, 2014. In terms of financial statement

reporting, GASB No. 68, Paragraph 20, requires that a liability should be recognized for

the net pension liability. As noted in Paragraph 20, ‘‘The net pension liability should be

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City of Providence, RI: A Case Examining the Financial Condition of a U.S. Municipality 131

measured as the portion of the actuarial present value of the projected benefit payments

that is attributed to past periods of employee service in conformity with the requirements

of Paragraphs 22–32 (Total Pension Liability), net of the pension plan’s net position’’ (GASB 2012, 9). Assume this requirement existed for 2011 and 2012. While Total Assets

do not change for these years, calculate the Total Liabilities, Net Assets, and Debt Ratio

for the city of Providence for these two years. Explain your results.

(14) A proposal was developed to reduce pensions of retirees as a cost-cutting initiative to

mitigate the financial pressures that Providence is facing. Would you support this

proposal? Why or why not? What other options are available to Providence to reduce its

pension obligations? Are there challenges associated with these options?

(15) See the Employee Retirement System Notes for 2011 and 2012 ( p. 49 of the CAFR for

each year). The investment rate of return is listed as 8.25 percent for each year. Do you

agree 8.25 percent is an appropriate rate? What are the pension benefit obligation (PBO)

implications of using a lower rate?

(16 ) Various municipalities have been accused of undervaluing pension benefit obligations.

Why is this a problem for those municipalities? How does this impact the decision

making of city managers? Current or potential city employees?

REFERENCES

Brown University. 2011. Brown and Providence: Alpert Medical School’s Contributions to the RI Knowledge Economy. Available at: http://brown.edu/web/providence/med-knowledge-economy.html

Citymayors.com. 2013. City Mayor Statistics: The Largest U.S. Cities. Available at: http://www. citymayors.com/gratis/uscities_200.html

Commission to Study Tax Exempt Institutions. 2010. A Call to Build the Capital City Partnership for Economic Growth. Providence, RI: Providence City Council.

Conley, P. T., and P. R. Campbell. 2012. History of the City: 375 Years at a Glance. Available at: http:// www.providenceri.com/archives/history/city-history

GoProvidence.com. 2012. Providence History. Available at: http://www.goprovidence.com/things-to-do/ history-facts/

Governmental Accounting Standards Board (GASB). 2012. Accounting and Financial Reporting for Pensions. Statement No. 68 of the Governmental Accounting Standards Board Available at: http:// www.gasb.org/resources/ccurl/988/315/GASBS%2068.pdf

GTECH Corporation. 2012. About GTECH. Available at: http://www.gtech.com/about-us Kain, E. 2012. Curt Schilling: 38 Studios Employees Were ‘‘Blindsided.’’ Available at: http://www.forbes.

com/sites/erikkain/2012/06/22/curt-schilling-38-studios-employees-were-blindsided/

McGowan, D. 2012. New: Providence Credit Rating Downgraded Three Notches. Available at: http://www. golocalprov.com/news/new-providences-credit-downgraded-three-notches/

Milken Institute. 2011. 2011 Best Performing Cities: 200 Largest Metros. Available at: http://bestcities. milkeninstitute.org/

Official Website of the City of Providence, Rhode Island. 2011. Smarter Cities Grant to Help Providence Develop Computerized Land Management System in Jewelry District. Available at: https://www. providenceri.com/mayor/smarter-cities-grant-to-help-providence-develop

Smith, M.R. 2011. New Providence Mayor Angel Taveras Sworn In. Available at: http://www.boston.com/ news/local/rhode_island/articles/2010/11/02/taveras_elected_first_hispanic_providence_mayor/

Stanton, M. 2012. Schilling’s 38 Studios Declares Bankruptcy: Law Enforcement Investigating. Available at: http://news.providencejournal.com/breaking-news/2012/06/38-studios-decl.html

Textron. 2012. Company History. Available at: http://www.textron.com/about/company/history.php Thomson/Rueters. 2012. Moody’s Downgrades Debt of Providence, R.I. Available at: http://www.

moneynews.com/FinanceNews/moodys-downgrade-providence-rhodeisland/2012/03/26/id/433921

Issues in Accounting Education Volume 30, No. 2, 2015

132 Earley, Feng, and Kelly

Trussel, J. M., and A. P. Patrick. 2009. A predictive model of fiscal distress in local governments. Journal of Public Budgeting, Accounting & Financial Management 21 (4): 578–616.

United States Census Bureau. 2010. Providence Rhode Island Quick Facts. Available at: http://quickfacts. census.gov/qfd/states/44/4459000.html

U.S. Department of Labor: Bureau of Labor Statistics. 2012. Table of Local Area Unemployment Statistics: Providence-Fall River-Warwick RI-MA Metropolitan Area. Available at: http://www.bls.gov/eag/eag. ri_providence_mn.htm (last accessed on March 12, 2015).

APPENDIX A

The financial statements are used with the permission of the City of Providence, RI.

CAFR_2011: http://dx.doi.org/10.2308/iace-51042.s1

CAFR_2012: http://dx.doi.org/10.2308/iace-51042.s2

CAFR_2013: http://dx.doi.org/10.2308/iace-51042.s3

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City of Providence, RI: A Case Examining the Financial Condition of a U.S. Municipality 133