PROVIDENCE, R.I. (WPRI) – The outlook on Providence’s credit rating remains negative, but the city’s projected $6.3-million surplus for the fiscal year that ended June 30 is a step in the right direction, according to a report released Friday by Moody’s Investors Service.
In keeping the city’s credit rating at Baa1, Moody’s cited “the continued fiscal challenges the city faces including a very weak reserve position and rising pension and healthcare costs” as its key concerns.
“The city’s ability to achieve structural balance and replenish reserves to adequate levels and address unfunded pension liabilities will be the focus of future reviews,” the report states. “Further erosion from current reserve levels will likely result in a downward rating action.”
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Moody’s also downgraded debt issued by the Providence Public Building Authority to Baa2. The debt includes school repair bonds, which are backed by the state.
Moody’s cut the city’s financial outlook to negative last year after the Elorza administration announced Providence ended the 2014-15 fiscal year with a $5-million shortfall, prompting the state auditor general’s office to ask the city for an updated deficit-reduction plan. Fitch Ratings later downgraded the city’s bond rating to BBB-.
But administration officials told Moody’s the city ended the 2015-16 fiscal year – the first budget crafted by Mayor Jorge Elorza – with a $6.3-million surplus. The budget for the fiscal year that started July 1 included a 4% increase in the city’s property tax levy thanks in part to a spike in residential property values in recent years.
Even though the city posted a surplus with its most recent budget, it is still paying down a cumulative deficit that grew to $13.7 million in 2015. (Paying down the deficit doesn’t mean that money is actually transferred to the state. The city is simply expected to run an operating surplus each year to offset the earlier red ink.)
Unlike an operating deficit, which only accounts for a shortfall that occurs within any one fiscal year, a cumulative deficit includes all deficits incurred in previous years. In Providence’s case, that means shortfalls during the 2011, 2012 and 2015 fiscal years.
In its report, Moody’s cited Providence’s credit strengths as its “sizeable tax base with stabilizing presence of higher education and health care institutions” as well as the city’s proximity to the “economically vibrant” Boston area and declining unemployment. Moody’s suggested that Providence could see an upgrade in its credit rating if it continues to chip away at the structural deficit, sees growth in the tax base and can reduce its unfunded pension and other post-employment benefits (OPEB) liabilities.
The challenges cited by Moody’s include the city’s “historically inconsistent financial performance,” high fixed costs and limited budgetary flexibility. The report states that any weakening of reserve levels, an increase in debt burden or a lack of progress on funding long-term liabilities could lead to a downgrade.
“Moody’s correctly points out that the accumulated fund balance, long-term liabilities, and historical lack of a multiyear capital plan have had a negative impact on the city,” Elorza said in a statement. “However, maintaining our current rating is an important improvement as we begin to see the results of our work. We are paying down our cumulative deficit, we’re reducing our long-term structural deficit, we have a strong cash position, and we’ve made our full pension payment sooner than we have in over a decade. The report credits the city’s efforts and positions us well for future upgrades.“
Providence’s unfunded pension liability grew to $900 million in 2015, according to its most recent audit. (An independent audit of the budget for the 2015-16 fiscal year will be released in December.) Moody’s estimates the city’s combined pension and OPEB liability was $1.9 billion last year.
By the end of the year, several working groups established by the Elorza administration are expected to make recommendations on ways Providence can reduce its retirement liabilities. The groups are also expected to review alternate revenue sources, such as the sale of major assets and securing more revenue from the city’s nonprofit colleges and hospitals.