COVENTRY, R.I. (WPRI) -- Coventry has come under the microscope in recent months as a school deficit abruptly ballooned to $5 million and a top credit-rating agency withdrew its assessment of the town's financial credibility. State leaders are now closely monitoring the town's finances, spurring school administrators to order a freeze on all discretionary spending just weeks into the school year. "During this discretionary spending freeze, all non-essential expenditures, which are not directly tied to critical educational activities or obligations, will be put on hold," Superintendent Don Cowart wrote in a Sept. 5 memo to all employees. "This discretionary spending freeze will remain in effect until further notice," he added. The deficit comes after years of poor financial record-keeping and reporting, along with an unwillingness by town voters to raise taxes during years with high inflation. (The town recently transferred authority over tax hikes to the Town Council.) Elected officials are now scrambling to balance the books. If addressed seriously, the problems should be fixable over the coming years, state officials said. And so far nobody interviewed on the local or state level is predicting a need for state intervention, as has previously happened in places like Central Falls, East Providence and Woonsocket. But fixing the problem will not be painless and ideas that will likely be considered in the coming months include tax hikes, job cuts and service reductions, as well as deferred maintenance and an already-unpopular idea of consolidating schools. "We're playing catch-up on all of the sins of our past," Town Council President Hillary Lima, who was first elected in 2021, told Target 12. "We're also just coming into a perfect storm." 'Budgetary problems dating back to 2019' The financial hole facing the western Rhode Island town is the byproduct of poor financial decisions over multiple years, according to multiple people in the schools, town and state who spoke to Target 12. State officials started becoming especially concerned with Coventry's finances this past spring when town officials hadn't submitted municipal audit reports since fiscal year 2020-21. Those are typically due within six months of the end of the fiscal year. In a joint letter to town officials, Auditor General David Bergantino and R.I. Division of Municipal Finance chief Stephen Coleman warned them of the consequences of working without a solid financial framework. They also raised concerns about potential overspending in the schools. "Timely financial reporting signals the soundness of financial practices, provides needed financial results for budget preparation and other decision-making, and allows finance staff to focus on the current fiscal year and other objectives," the state leaders wrote on April 4. One month later, town officials reported to the state that the schools were facing a $610,000 deficit, which they proposed to close by steering extra money into the district over five years. But that estimate for the deficit didn't hold. School officials this month provided updated numbers to the state showing the hole had increased sevenfold to $5 million. For context, the figure represents about 10% of the entire school budget for the current fiscal year. Cowart said the issue has been growing for years. "It's crucial to emphasize that the current administration, including a new finance director and superintendent completing their first full year, has proactively identified and reported budgetary problems dating back to 2019," he said in a statement. For example, he pointed to under-budgeted costs, unexpected cost increases in transportation and out-of-school tuition, and "a significant salary budget error, attributable to a human error by the previous director." Tension within the town The poor financial situation in the school district has led to tension with the town, which has reported relatively healthy operating budgets in recent years. Lima said she's frustrated town officials don't have a good handle on the real financial picture coming out of the school department. And she said the numbers change sometimes on a month-to-month basis. "I have an issue believing that this is the final number we'll hear in terms of a deficit," Lima said about the $5 million hole. "I need to know what the rock-bottom number is here." Cowart fired back at the criticism from the town, saying the school administration has taken tangible steps toward shoring up the district's finances, including teacher layoffs last spring and cutting where possible. He said, "it is regrettable that certain Town Council members have adopted an adversarial stance towards the School Department." "We strongly believe that divisive rhetoric is counterproductive," he added. "Instead, we advocate for a unified approach to address these challenges." 'Significant concerns' on the state level The local tensions and inconsistent financial reporting from schools have fueled uneasiness among state officials. Bergantino has called a meeting for school, town and state leaders about the problems on Oct. 9. "We have significant concerns," Bergantino and Coleman wrote in a letter sent to the town on Sept. 18 after they learned of the $5 million estimated school deficit. "Late audited financial statements combined with the inability to provide consistent andaccurate unaudited financial reporting has rapidly resulted in a considerably more significantfinancial issue that must be promptly and comprehensively addressed," they added. Adding to the town's financial woes, Moody's Ratings earlier this month withdrew its credit rating for town bonds issued in 2019. Moody's, one of the nation's largest credit-rating agencies, pointed to the town's poor financial reporting. "Coventry, RI’s rating was withdrawn for lack of sufficient information," Moody's senior analyst Nicholas Lehman told Target 12. He noted Moody's still hadn't seen a financial audit for the town's 2022-23 fiscal year, which ended more than a year ago. "Since we have not received the audit within one year of the fiscal year ending, we cannot determine if the financial position still supports the rating and Moody’s Ratings practice is to withdraw the rating due to lack of sufficient information," he explained. "It is possible for us to reinstate the rating once the town provides the fiscal 2023 audited financial information.” National credit ratings are crucial for municipalities when they seek to borrow money for big capital projects, such as sewers, roadways or schools. The better the rating, the lower the cost of borrowing for taxpayers. Withdrawn ratings, meanwhile, are often a red flag for investors. And Moody's withdrawal comes at an especially delicate time for Coventry. The town has been planning to issue $25 million in bonds for new school construction in early 2025. "I find this personally unacceptable," Lima said. "Obviously, we didn't get into these issues overnight and it's taken longer than we would have liked to get them solved. But the public understands and is asking for a higher standard in terms of accountability from our own." Lima is optimistic that Moody's will reinstate its rating once the town gets back on track with its financial reporting, which town officials are hoping will happen by the end of the year. But she's not convinced the sloppiness won't hurt the town's credit rating, and she isn't interest in issuing new bonds until the rating is reinstated and the town can reassess what that means in terms of costs. "I want to evaluate what the interests are going to look like," she said. "I want to make sure we're getting the best bang for our buck for taxpayers." Eli Sherman ([email protected]) is a Target 12 investigative reporter for 12 News. Connect with him on Twitter and on Facebook. Close Thanks for signing up! Watch for us in your inbox. Subscribe Now Daily Roundup SIGN UP NOW