Wall Street analysts and state financial regulators are raising questions about Coventry’s financial health as the school system struggles with mounting debt.
Days after Moody’s withdrew Coventry’s credit rating last week, Rhode Island’s auditor general and chief municipal finance officer requested a meeting with city leaders and a corrective action plan to address a multiyear $5 million deficit in the school department’s accounts.
According to Auditor General David Bergantino and City Finance Chief Stephen Coleman, the problem is that the city is still trying to eliminate the school deficit from the 2021-2022 budget year, but the school accounts for the years after that have fallen further into the red with no plan to eliminate the deficit.
Additionally, the city has been behind in issuing audited financial statements since the pandemic years.
“Late audited financial statements combined with the failure to provide consistent and accurate unaudited financial reporting has quickly resulted in a significantly more significant financial problem that must be addressed quickly and comprehensively,” state officials wrote in a letter to Town Manager Daniel Parillo. “Formalized corrective action plans must be submitted to address and eliminate the school’s known and anticipated deficits.”
According to Bergantino and Coleman, Coventry projected an operating deficit of $822,000 for the school division in the fiscal year ending June 30. However, on September 10, it was reported that the deficit was actually $2.5 million.
This month’s call for a recovery plan follows a letter Bergantino and Coleman wrote to Parillo in May, urging the city to include money in its 2024-25 fiscal year budget to pay off the school’s debt and provide updated financial data.
“While the City’s proposed allocation takes into account the existing cumulative deficit from fiscal 2022, it does not take into account the School Department’s current projections for fiscal years 2023 and 2024, whether through appropriation, cost-saving measures, or surplus generation,” the May 3 letter said. “The inability to have current audited financial statements and accurate projections from the School Department limits our ability to make meaningful judgments about the City’s and School Department’s finances and the adequacy of a deficit reduction plan.”
The state’s latest letter came after Moody’s on Sept. 13 withdrew credit ratings for Coventry and four other municipal entities due to what the agency described as failure to report financial information.
The Journal reached out to Parillo for comment. On Wednesday, City Council President Hillary Lima responded in an email that the council was “surprised” by Moody’s announcement and “was not aware of any prior communications with the city.”
“Moody’s recent decision to withdraw Coventry’s bond rating is deeply concerning and requires immediate attention from the City Council,” Lima wrote. “The City Council is fully aware of the serious implications this decision could have on Coventry’s ability to borrow, finance projects and obtain favorable interest rates in the future.”
Let’s flash forward to the warnings from Bergantino and Coleman, and Lima warned the school division on Friday.
“The cumulative deficit of over $5 million recently disclosed by the Coventry School Department is more than just concerning — it is symptomatic of a deeper, systemic failure in financial management,” Lima wrote in an email. “This is not just a blip on the radar; as the largest department in the city, absorbing nearly 65% of the city’s total spending budget, the School Department’s inability to get a handle on managing its finances directly jeopardizes the financial health of Coventry as a whole.”
She added that the city “will not accept the wildly varying financial reports it receives from the schools month after month,” which “calls into question the integrity of the Department of Education’s financial management and reporting.”
The financial health of Rhode Island cities and towns was a major concern after the Great Recession, but recent years have seen economic growth and generous pandemic aid from the federal government to municipal and school departments.
In response, Coventry schools acknowledge “the issues with collecting and reporting financial information”, but noted that they have “proactively identified and reported budgetary issues dating back to 2019”.
Superintendent Don Cowart’s statement explained the red numbers: the deficit reported in March had grown due to “underfunding” and “unexpected cost increases in areas such as transportation and tuition for out-of-district students.”
“We also discovered a significant error in the salary budget, which was due to human error by the previous CFO,” the statement said.
“It is regrettable that certain councillors have taken an adversarial stance towards the Schools Department,” the Schools Department statement said. “The resulting budget constraints due to underfunding of Coventry Schools have necessitated difficult decisions, including the historic elimination of numerous teaching and support staff positions. There are not many more savings to be made.”
This article originally appeared in The Providence Journal: Moody’s scraps Coventry credit rating amid mounting student debt
