NEW DELHI & SYDNEY & SINGAPORE--()--Fitch Ratings assigns an 'AA-' rating to the state of Rhode Island and Providence Plantations' lease participation certificates consisting of:
--$31.5 million 2011 series A (Energy Conservation Project).
The bonds are expected to sell via negotiation on or about July 20, 2011.
In addition, Fitch affirms the following ratings:
--$1.049 billion in outstanding general obligation (GO) bonds at 'AA';
--$724.3 million in outstanding appropriation-backed debt at 'AA-', also issued through the Rhode Island Economic Development Corporation.
The Rating Outlook has been revised to Stable from Negative.
SECURITY
Certificates are secured by lease rental payments to be made by the state subject to annual legislative appropriation.
CREDIT SUMMARY
--The assigned rating and revised Outlook to Stable from Negative reflect the state's improved financial position, stabilizing economic indices, longstanding financial controls, and prudent issuance of additional debt.
KEY RATING DRIVERS
STABILIZING ECONOMY: The most recent economic data suggest that the state's recovery, from one of the worst state economic performances in the downturn, has begun, although employment gains are expected to be slow over the next several years.
FINANCIAL CONTROLS: Longstanding financial controls remain in place while state-source revenues have rebounded, resulting in surplus operations and allowing the state to add to its rainy day fund in fiscal 2011.
MODERATING DEBT RATIOS: The state has been prudently managing the issuance of additional debt to lower above-average debt ratios, which have moderated from previously high levels. Pension funding levels are low and are a concern, but the state is committed to addressing this issue in a special fall session.
WHAT COULD TRIGGER A RATING ACTION
Changes in the state of Rhode Island's GO rating, to which this rating is linked. The state's GO rating will be driven by a continued commitment to budget balance and rebuilding reserves together with stabilizing economic indices and employment growth.
CREDIT PROFILE
The 'AA-' rating on the certificates is based on the credit quality of the state as they are secured by lease rental payments to be made by the state acting by and through its department of administration, the state's central administrative, management and fiscal agency. Such payments, dependent upon annual legislative appropriations, are assigned to the trustee by a grantor trust for the benefit of the certificate-holders. Lease payments, solely representing debt service, are made separately for each project under subleases. The subleases are annually renewable, although renewal is automatic upon appropriation.
The state's 'AA' GO bond rating reflects an economic performance that was amongst the weakest of the states in the downturn and is forecast to be slow in returning to prior growth patterns. After adding jobs every year from 1992 through 2006, the state fell into the recession early, with year-over-year job losses beginning in August 2007. Rhode Island's unemployment rate reached 11.8% in December 2009 and maintained that rate for four consecutive months as compared to a national average that hovered in the high ninth percentile. These weak economic conditions and a struggling real estate market pressured state revenues and challenged fiscal health and stability, severely straining the state's financial position. The Outlook revision to Stable reflects an improved financial position and stabilizing economic indices.
The state's economic picture has stabilized, indicated by an unemployment rate that while remaining above national averages (10.9% compared to 9.1% for the U.S. in May 2011) year-over-year has declined at a faster pace than the U.S. After losing jobs on a year-over-year basis for all of 2008 and 2009, the state recorded a year-over-year employment increase in August 2010 and has fairly steadily added to its employment rolls to date. Future growth in the economic base is forecast to be steady, but slow, with recent economic forecasts pinning the state's return to peak employment as occurring in 2018. Job sectors experiencing the most resurgence are administrative support services and healthcare. The recent strengthening in the economy has boosted economically sensitive revenue sources, improving financial margins, and providing the state the opportunity to add to its reserves.
Rhode Island's personal income indicators have been notably weaker than national and regional averages, with gains in annual personal income that have been well below national averages. Evidencing the recent economic improvement, personal income growth matched the U.S. average in 2010 and the first quarter of 2011 shows year-over-year growth in personal income that has surpassed both the region and the nation.
A severely weakened real estate market followed years of strong real estate market development and appreciation. Rhode Island saw a steep market correction, with additional pressures from delinquencies, foreclosures, and subprime mortgage failures. At the end of the first quarter of 2011, the state's subprime mortgages in foreclosure remain above the national average; 15.3% to 14.7% for the U.S., placing Rhode Island twelfth amongst the states by Global Insights. Residential real estate prices are forecast to continue to fall in 2011, prior to sustained price increases beginning in 2012.
The state's finances felt the effects of the recession early, with revenue declines beginning as early as November 2007. Fiscal 2008 closed with a deficit of approximately $43 million, even after deficit financing in the form of tobacco settlement bonds, and the state grappled with multiple rounds of budget gaps in fiscal 2009. At the close of fiscal 2009, the state's reserve carried a balance of $80 million, equal to 2.7% of revenues. The General Fund ended fiscal 2010 with an unreserved, undesignated balance of $17.9 million, an increase of $80.2 million from June 30, 2009. The Budget Reserve and Cash Stabilization Account ended the fiscal year with a balance of $112.3 million, the maximum allowed by law. This was an increase of $32.2 million in comparison with the previous fiscal year.
A budget gap of $427 million was estimated for fiscal 2011 and was subsequently closed through local aid and school cuts, federal stimulus funds from two additional quarters of enhanced FMAP, savings from the prior year's pension reform, and an increase in hospital license fees. Markedly improved revenue forecasts, supported by receipts through May 2011, of 9.0% year-over-year growth in personal income tax collections, 2.3% year-over-year growth in sales tax revenue, and a total 4.8% year-over-year increase in General Revenues results in estimates of fiscal 2011 ending with a $57.2 million operating surplus and $80.8 million deposit to the Budget Reserve Fund, increasing total rainy day funds to $130.6 million.
An early, estimated budget gap of $295 million for fiscal 2012 was largely addressed through structural budget solutions, encompassing both revenue enhancements and expenditure modifications, demonstrating the state's well-managed financial operations. Surplus revenue from fiscal 2011 of $57.2 million was rolled into fiscal 2012, and when combined with $66.7 million of increased revenue forecast for fiscal 2012, reduced the expected gap to $171 million. To close the remaining gap, rather than adhering to the governor's recommended modifications to the sales tax structure in the state, the legislature chose to extend the current 7% sales tax rate to additional items, increased various user fees, increased the hospital licensing fee, and cut social services spending and spending in other departments. The state is planning for a $90.5 million addition to its rainy day fund at fiscal year-end.
Rhode Island's debt ratios are on the high end of the moderate range, with net tax-supported debt of approximately $2.3 billion equal to about 5.1% of personal income. The state has made a concerted effort to reduce debt levels although issuance increased in fiscal 2009 with debt for transportation programs and bonding for the state's historical structures tax credit liability to provide budget relief. Pension funding, at 48.4% as of June 30, 2010, is weak, reflecting a broad system change in April 2011 whereby the plans' investment return rate was modified to 7.5% from 8.25%; the rate of inflation was lowered from 3% to 2.75%; wage inflation was decreased from 4.5% to 4.0%, and the life expectancy of retirees was increased. These changes had the effect of sizably increasing the system's unfunded liability. The state plans a special session this coming fall to address the institution of reforms to improve the system's funding ratios.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010;
--'Enhancing the Analysis of U.S. State and Local Government Pension Obligations', dated Feb. 17, 2011.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Facebook
Twitter
LinkedIn
Delicious
Reddit
StumbleUpon
Digg
MySpace
Newsvine
Google Bookmark
Yahoo! Bookmark
Email
Email 
