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Standard & Poor’s lowers Providence’s rating

March 31, 2011

The City of Providence, following similar recent action by Fitch and Moody’s, has been hit with a downgrade in its debt rating:

Standard & Poor’s Ratings Services has lowered its long-term rating and underlying rating (SPUR) on Providence, R.I.’s general obligation (GO) debt two notches to ‘BBB+’ from ‘A’, reflecting significant deterioration in the city’s general fund balance coupled with structural deficits projected for fiscals 2011 and 2012. The outlook remains negative, reflecting ongoing fiscal pressure.

Standard & Poor’s also lowered its long-term rating and SPUR on the lease revenue debt issued by Providence Public Building Authority, Providence Redevelopment Agency, and Rhode Island Health and Educational Building Corp., supported by the city, to ‘BBB’ from ‘A-‘, reflecting the lowering of the GO debt rating. The outlook remains negative.

In addition, Standard & Poor’s lowered its rating on debt secured by the moral obligation of the city, including the city’s series 2005E, 2005F, and 2005G special obligation tax-increment refunding bonds and the redevelopment agency’s certificates of participation, issued for the Port of Providence, to ‘BB+’ from ‘BBB’, reflecting the lowering of the GO rating. The outlook remains negative.

At the same time, Standard & Poor’s assigned its ‘BBB’ long-term rating and negative outlook to the public building authority’s $35 million series 2011A lease revenue bonds, based on its view of the lease’s annual appropriation nature and Providence’s underlying credit characteristics.

The ratings reflect Standard & Poor’s opinion of weaknesses in the city’s:

• 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; and
• Very large, $828 million unfunded pension liability and $1.5 billion unfunded other postemployment benefits (OPEB) liability.

Factors supporting 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; and
• Sizable tax base with strong per capita market valuation despite a sizable drop in valuation for fiscal 2011 due to a full revaluation.

The negative outlook reflects the deterioration in the city’s general fund balance position over the past two fiscal years and its consequently diminished financial flexibility. “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. 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,” he added.

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