May 5, 2012

Providence's $5 Million Advance

Patrick Laverty

According to a Ted Nesi article on yesterday, Providence will be receiving a $5 million advance from Johnson & Wales University (JWU) immediately. Back in February, JWU agreed to commit $6.4 million to the city over the next 10 years.

What also makes this interesting is the city's explanation on what they'll do with the money and the accounting now.

“JWU is advancing the city $5 million on their agreement because they knew the city needed cash,” Taveras spokesman David Ortiz told “However, we are only recognizing $650,000 in revenue this year and for each of the next nine years, so not all $5 million goes to the budget.”
The mayor's spokesman also added:
The City Council agreed to accept the cash now and budget it over time
So this sounds like the city is going to take the $5M (of the $6.4M) now, spend it, but write down that they spent $650,000. And then in subsequent years, again write down $650,000 on the budget.

I'm no CPA or anything like that, but shouldn't what is on the budget actually match what you're doing? If you're going to spend five million dollars, shouldn't the ledger reflect that? Plus, what happens in future years when the budget says you're spending $650,000 of the money from JWU and the money isn't there? What happens when Angel Taveras is no longer mayor and the next mayor's administration tries to make sense of this accounting? Will they simply refer to "prior administration's fiscal mismanagement?" I'm not calling it mismanagement, I just know that pols love to blame the previous guy. Well, except in Taveras' case.

I understand the reason for the advance. Plain and simply, the city will run out of money and checks will bounce without doing it. However the accounting sounds like something that's happened around here before, plugging budget gaps by using the tobacco settlement money or creating jobs and departments with one-time federal stimulus money. It works great to keep the creditors at bay for now, not so good for next year.

On another angle, what will the bond rating agencies think of this?

Matthew Stephan, an analyst at Standard & Poor’s, said this week the additional payment from Brown to Providence “could help firm up cash” for the city through the end of June.

“Given the relatively small amount of the projected shortfall and the recently agreed upon Brown University payment, we understand the city will manage its cash flow very carefully through the end of the fiscal year and does not expect to borrow for cash flow,” Stephan wrote in a note to investors obtained by

“However, if the city were to experience a delay in the JWU and/or Brown University payments or if there were unexpected negative budget variances, we believe it is possible the city would need to issue short-term cash flow notes to provide liquidity through the end of the fiscal year,” Stephan continued.

However, I believe this statement was issued before City Councilors Hassett and Igliozzi let it be known that they will submit an amendment to the recently passed ordinance to reduce the amount cut from the pension system. If their amendment were to pass, then there is a "negative budget variance" and the city would possibly need to "borrow for cash flow."

This just seems like some pretty interesting accounting and I'm hoping I'm wrong on how it works. I'm just confused when the mayor says he needs a certain amount of money per year and then spends a large chunk of that in year one. What happens next year? Or is that when the heat gets turned up on Providence College, RISD and the other tax-exempts?

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I think you might misunderstand. The idea is to put $5M in the bank but ONLY put $650K in the budget per year. That will give the city some much-needed 'slush' in the bank account while preventing the 'revenue' side of the budget from going up, which will induce just as much spending.

Right now the budget and the accounts don't match up and the city is dangerously close to bouncing checks. This will help that.

Posted by: mangeek at May 7, 2012 11:18 AM
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