NEW YORK - Fitch Ratings – a global rating agency – downgraded Providence’s bond rating from “A” to “BBB” and characterized its outlook as “negative.” The three-level drop puts the city’s rating just two steps above junk bond status.
The downgrade is the result of a continued decline in Providence’s financial flexibility over the last year, which left the city in a weak liquidity position. The risk, Fitch says, is compounded by its concern about the city’s ability to address future deficits.
The BBB rating is described by the agency as being “satisfactory at the moment.” Prior to the downgrade, Providence held the third-highest rating - “A.” If Providence’s BBB rating drops any further the city will drop from “Investment Grade” to “Non-Investment Grade.”
Fitch is also concerned about the city’s ability to generate an adequate cash flow to support current operations and close future budget gaps. Providence’s cash reserves have essentially been depleted, and the city has a growing and severely under-funded pension and post-retirement benefit liability.
The fiscal 2012 budget included an increase in anticipated payment-in-lieu-of tax payments of $7.1 million from tax-exempt institutions. To date, only Johnson & Wales University has agreed to an increase in its payment equal to $643,000 to $1.1 million per year, leaving the city short the remaining budgeted amount.
The remainder of the $22 million shortfall is comprised of approximately $5 million of overspent funds in public safety and a $2 million shortfall in revenue in other areas.
On a positive note, the state Department of Revenue and State Auditor General’s office have been in contact with city officials, monitoring the timely disbursements of federal and state aid to the city, which Fitch considers a credit positive.
According to the global rating agency, Providence continues to manage its outstanding payables and receivables to ensure sufficient cash flow to timely meet its debt service payments and pay employee salaries. Management was effective, the agency said, in eliminating a significant portion of its structural deficit for fiscal 2012 and management continues to seek budget-balancing options.