NEW: Providence Drops Again in Financial Ratings

Thursday, March 31, 2011

GoLocalProv Business Team

Another financial blow for Providence as Standard & Poor's Ratings Services dropped its rating on Providence's general obligation debt rating two notches from “A” to “BBB+,” the third-lowest investment rank.

This unwelcome news comes on the heels of both Moody’s Investment Services and Fitch Ratings cutting the city’s rating by two grades in mid-March. The two also indicated at that time that the outlook for Providence was “negative,” and Standard & Poor’s echoed that view.

The ratings reflect Standard & Poor's opinion of weaknesses in the city's overall picture:

Low unreserved general fund balance following drawdowns in fiscals 2009 and 2010, due primarily to drastic cuts in state funding
Significant structural deficits projected for at least fiscals 2011 and 2012
High unemployment and merely adequate income levels
Very large, $828 million unfunded pension liability and $1.5 billion unfunded other post-employment benefits liability

On a positive note, Standard & Poor’s said that factors providing support to the city's credit quality include its:

Good financial management policies and practices, coupled with the new administration's demonstrated willingness to make difficult expenditure cuts to restore structural balance
Position as Rhode Island's economic center, with significant government, health, and higher education sectors supporting the region
Sizable tax base with strong per capita market valuation despite a sizable drop in valuation for fiscal 2011 due to a full revaluation.

Standard& Poor’s negative outlook, echoing those of Moody’s and Fitch, reflects the deterioration in the city's general fund balance position over the past two fiscal years and its consequently diminished financial flexibility. It also indicated that the city’s rating could continue to fall, although it held out some hope for the future if certain steps are taken.

"Though city management has identified a number of budget adjustments in an attempt to restore structural balance, it is uncertain at this time whether such adjustments will be sufficient to close the sizable budget gap," said Standard & Poor's credit analyst Matthew Stephan.

"If structural balance is not restored and the city's general fund position continues to deteriorate, the rating could be lowered,” Stephan added. “The rating may also be lowered if the city becomes significantly cash-constrained, particularly if the sale of these lease revenue bonds proves unsuccessful. If, on the other hand, expenditure cuts, revenue stability, and good management policies allow the city's finances to stabilize and then improve, we could revise the outlook to stable.”

“The Taveras administration will do whatever is necessary to stabilize Providence’s finances, improve the city’s operating reserves, and make full annual required contributions to the city’s retirement system,” David Ortiz, the mayor’s spokesman, said. “Such actions will put Providence in position to restore its rating.”

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