S&P, Moody’s offer mixed views on Providence

PROVIDENCE, R.I. (WPRI) – Standard & Poor’s and Moody’s Investors Service have declined to upgrade Providence’s bond rating, but S&P revised the city’s outlook from stable to positive, according to reports released Thursday by the Elorza administration.

City officials met with analysts from the two agencies along with representatives from Fitch Ratings last month to make the case for an upgrade before they plan to borrow $45 million for infrastructure improvements later this year. Fitch hasn’t released its findings.

S&P kept the city’s long-term rating at BBB, but changed the city’s outlook to positive based on “the city’s improved budgetary performance.” The firm said growth in the city’s taxable valuation – from $10.6 billion in 2014 to $11.5 billion in 2016 – along with “administrative changes and stronger operational controls” have contributed to better results.

In keeping the city’s credit rating at Baa1 with a negative outlook, Moody’s said the city has a “weak but improving financial position.” The firm found the city’s credit strengths include its sizeable tax base, a healthy development pipeline and its close proximity to the Boston metro region. Challenges include a large unfunded pension liability, high fixed costs, very narrow financial reserves and weak resident wealth and income.

Both firms praised the city for eliminating its $13.4-million cumulative deficit – shortfalls accumulated over several years – by posting consecutive $10-million surpluses. (The total surplus for the fiscal year that ended June 30 won’t be final until independent auditors complete their review of the city’s finances later this year.)

“The positive outlook assigned by S&P is a clear indication we are heading in the right direction,” Mayor Jorge Elorza said in a statement. “My administration has been focused on eliminating the city’s deficit, realistic budgeting and finding efficiency in every city department.”

The biggest red flag about the city’s finances continues to be its nearly $2 billion in unfunded retiree pension and health care obligations.

Moody’s called the unfunded pension liability – $985 million as of June 30, 2016 – a “material weakness in the city’s credit profile,” noting that the city’s annual required contribution to the pension system is scheduled to reach $100 million by 2025. The firm said the city has had success in reducing its retiree health costs, dropping from $1.5 billion in 2010 to $981 million in 2014.

S&P said the city hasn’t developed a plan that will sufficiently address the retirement obligations and called the pension system’s 25% funded ratio “very low.” The firm also called the city’s 8% assumed investment rate of return on the pension “fairly optimistic,” but said the city is working to reduce the rate to 7%, which is closer to industry standards.

Both firms expressed support for the administration’s plan to sell or lease the Providence Water Supply Board and use the proceeds to fund the pension system, although S&P said it would be “fairly difficult to realize as there are several stakeholders needed for approval.” Each firm said the city hopes to generate between $300 million and $400 million from a water transaction.

S&P and Moody’s also highlighted the city’s momentum when it comes to economic development, noting that permitting activity has grown substantially over the last two years. Moody’s said that while tax incentives granted to stimulate construction “will dampen the near term direct financial benefit” of most major projects, “the development pipeline positions the city for healthy tax base growth over the next decade.”

Neither agency weighed in specifically on the city’s plan to borrow $45 million for infrastructure improvements, but each had a favorable view of the city’s broader five-year capital improvement plan.

During the first two years of the plan, the city would spend $48.5 million on a wide array of projects, including recreational facility improvements, building repairs in City Hall and sewer repairs. About $23.5 million of the money will be set aside for street paving and sidewalk repairs.

Other significant projects in the first two years of the plan include $3 million for remediation work on the police department’s firing range, $2 million for turf at Conley Stadium at Mount Pleasant High School, $335,000 for a seawall replacement at India Point Park and $275,000 for improvements to Waterplace Park in downtown.

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Dan McGowan ( dmcgowan@wpri.com ) covers politics, education and the city of Providence for WPRI.com. Follow him on Facebook and Twitter: @danmcgowan