NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB' rating on the following City of Providence, RI's (the city) outstanding general obligation (GO) bonds:
--$11.1 million GO bonds, series 2001B;
--$37.1 million GO bonds, series 2013A.
The Rating Outlook remains Negative.
The bonds are general obligations of the city, backed by its full faith and credit and unlimited taxing authority.
KEY RATING DRIVERS
SLOW FINANCIAL RECOVERY: The maintenance of the Negative Outlook reflects Fitch's view that the city still faces financial pressure and limited flexibility despite notable progress in reducing prior year structural deficits and successful pension reform. Challenges include reversing its negative fund balance position considering statutory revenue limitations, a shortage of additional cost cutting solutions, and increasing employee benefit costs.
HIGH FUTURE RETIREE COSTS: The city's high pension and other post-employment benefit (OPEB) liabilities result in a growing fixed-cost burden on the budget. Continued full funding of actuarially required pension contributions and changes to retiree benefits should control growth in near-term costs and reduce future liabilities over time.
ECONOMIC STABILITY; WEAK DEMOGRAPHICS: Long-term economic stability is derived from the city's position as the capital of the state and its large educational and healthcare institutional presence. Demographics are weak with low wealth levels, improved but still high unemployment and slow-growing assessed values.
CONTINUED PROGRESS TOWARDS RESERVE RESTORATION: An inability to demonstrate continued reductions in its general fund deficit position could result in a downgrade.
FINANCIAL CONDITION IMPROVED, BUT STILL PRESSURED
Providence's management continues to make progress in restoring stability to financial operations but the city's cumulative general fund balance remains negative. Revenue-raising flexibility to meet growing expenditures is constrained by slow tax base growth and statutory levy restrictions, compounding the potential difficulty for a timely restoration of reserves.
The financial condition has improved markedly from fiscal 2012 when the city faced a sizable structural imbalance of $110 million (17% of fiscal 2012 city and school spending). Significant cost cutting measures, implementation of new recurring revenues, including a property tax increase, helped the city restore some stability. Nevertheless, the city ended the 2012 fiscal year with a negative unrestricted general fund balance of $11.4 million (-2.5% of general fund spending).
Management made progress in fiscal 2013 in reigning in pension costs by approximately $18 million (4% of total spending) annually through pension reforms agreed to with employees and retirees. Reforms included a 10-year suspension of cost of living adjustments. Efforts to restore fund balance included a $5.7 million appropriation in its fiscal 2013 budget as part of management's five-year plan to reduce the deficit balance.
FISCAL 2014 RESULTS SHOW MODEST SURPLUS
General fund results for fiscal 2014 showed a modest net operating surplus (after transfers) of $1.2 million (0.3% of spending) resulting in a negative $8.7 million unrestricted fund balance or 1.9% of spending. This followed a $1.6 million surplus in fiscal 2013; the second year of a surplus after a four-year trend of general fund operating deficits.
Fiscal 2014 results reflected increased state payment-in-lieu-of-tax (PILOT) revenues and reduced debt service costs as a result of debt refunding. Transfers out for above-average medical claims offset some of the positive revenue variances. The school fund also reported surplus operations of $0.9 million which was returned to the city as required by policy. The budget included a $3.9 million appropriation for deficit reduction but the full appropriation was not realized.
FISCAL 2015 BUDGET
The fiscal 2015 general fund budget of $458 million was up 2% compared to the fiscal 2014 budget, a slight decline from 3% the prior year. The property tax levy was increased by 1.66% (well below the 4% tax levy cap) and state aid for city and school operations was up. The budget includes a $3.2 million appropriation for general fund deficit elimination.
Public safety expenses, including pension costs of $66 million (up from $62 million) and wage increases, were the primary expenditure drivers for the city.
Management reports general fund expenditures slightly ahead of revenues through Dec. 31, 2014 by approximately $3.6 million (0.8% of budget). Results are driven partly by a delayed receipt of proceeds from the expected sale of capital assets and certain overtime and medical expenditures exceeding budget. Management has outlined to Fitch a plan for resolving the deficit through a combination of revenue enhancements and expenditure reductions through fiscal year end. Fitch remains concerned about the slower than planned progress towards deficit elimination but believes continued progress will continue.
CASH FLOW BORROWING NOT NECESSARY
Management reports that the city has not experienced any cash flow issues with all payments made on time and no need for internal borrowing. Property tax revenues are collected in quarterly installments and annual collections have averaged at or better than budgeted expectations. Fitch has reviewed fiscal 2015 cash flow projections, which appear reasonable, and once again show adequate cash flow throughout the fiscal year. No cash flow borrowing is anticipated.
LOW-TO-MODERATE DEBT LEVELS; HIGH FUTURE RETIREE COSTS
The city's debt ratios, net of the state's reimbursement for school projects, are below average with debt-to-market value at 2.6% and debt per capita at $1,611. Amortization is rapid at 76% of principal in 10 years.
The city's pension and OPEB costs continue to be a concern to Fitch as the combined unfunded liability is a very high percentage of market value. Negotiated reforms reflected in the July 1, 2013 retirement system valuation show a reduction in the unfunded liability of $69.5 million from $901 million as of July 1, 2011 to $831.5 million as of July 1, 2013. The unfunded liability was projected to increase to $965 million pre-reform.
The pension funded ratio is a low 31% using the city's liberal 8.25% investment rate of return. The funded ratio declines to a Fitch-estimated 28% using a 7% rate of return, and the unfunded liability using that calculation represents a high 8.8% of fiscal 2015 total assessed value (TAV) of $11 billion.
The city's pension contributions were $62 million in fiscal 2014, up from $58 million in fiscal 2013, and equal to 101% of its annual required contribution (ARC). These costs represent a moderate 8.1% of total governmental spending. Pension contributions for fiscal 2015 were budgeted at $67 million for fiscal 2015 (100% of ARC) and are projected to increase to $71.6 million for fiscal 2016 (up 7.7%). Prior to pension reform efforts the growth in these costs was projected to be higher.
OPEB contributions were $30 million for fiscal 2014, equivalent to 45% of the ARC. The city's OPEB liability was a very high $1.03 billion as of July 1, 2013 (down from $1.2 billion a year prior) or a high 9.4% of TAV. Combined debt service, pension, and OPEB pay-as-you-go payments made up a slightly high 23% of total fiscal 2014 governmental spending.
BELOW-AVERAGE SOCIOECONOMIC INDICATORS
The city, with a 2013 population of 177,994, is the capital of Rhode Island and continues to be a major economic and employment center for the state. The numerous government offices and healthcare and higher education institutions, including Brown University, Providence College and Johnson & Wales, provide stability to the region's economy. The city's top 10 taxpayers represent a low 9% of total taxes levied in fiscal 2014.
TAV declined by 7.3% for fiscal 2015 as a result of a three-year revaluation effective Dec. 31, 2013. Management reports that new development and the opening of new retail stores continues to occur, but overall economic growth is expected by Fitch to lag that of other major metropolitan areas in the northeast.
Unemployment levels have improved notably to 8.5% in November 2014, down from 10.3% the prior year with employment increasing 2.3% and labor up 0.3% for the same period. Rates remain above state (6.6%) and national (5.5%) averages. Wealth and income levels are lower than state and national levels with the large student population a contributing factor. The poverty rate was a very high 29% for 2013.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria