Fitch reaffirms AA rating for state general obligation bonds

PROVIDENCE – Despite a renewed call to stop repayment of state moral obligation bonds issued for the now-bankrupt 38 Studios LLC, Fitch Ratings Inc. expects payments will continue and has reaffirmed an AA rating with a stable outlook for the state’s general obligation bonds and consolidated capital development loans.
The global rating agency on Friday assigned the financial grade, citing a handful of positive signs, including the state’s sixth consecutive year of tax revenue growth, proactive steps taken to close budget gaps and its moderated liability position. The assessment, however, is offset by below-average economic growth, which Fitch expects will continue as Rhode Island’s economic performance trails national trends and has lagged in its recovery from the Great Recession.
“Despite the below average economic performance, general revenues increased for the fifth and sixth consecutive years in fiscal 2014 and 2015, signaling modest but continuing fiscal recovery and allowing Rhode Island to maintain its budget reserve at the full 5 [percent] requirement of general revenues,” according to the rating.
The rating cites Gov. Gina M. Raimondo’s Reinventing Medicaid Act as contributing to expenditure reductions, saying the R.I. Executive Office of Health and Human Services is on track to achieve “the vast majority” of its projected $75 million in recurring savings beginning this fiscal year. The Raimondo administration expects annual recurring savings could reach $120 million next fiscal year compared with pre-reform cost trajectory.
Citing the state’s multiyear budget outlook, including a general revenue fund deficit of $192.6 and $233.6 million in fiscal 2018 and fiscal 2019, respectively, the rating agency warns of lackluster economic growth and a reduction of lottery and gaming-related revenues caused by the opening of casinos in southeastern Massachusetts. Although, Plainridge Park casino, of Plainridge, Mass., opened last year and has produced lower than expected tax revenue.
Looking at the state’s above-average liabilities, Fitch cites the 2011 overhaul of the state’s pension system, along with recent settlements made with state unions, as contributing factors to why the rating agency now views Rhode Island’s long-term liability levels as “manageable for the state.”
Finally, in examining the state’s commitment to moral obligation bonds, Fitch expects the state will “sustain its full support of these bonds through final maturity,” according to the rating. In 2010, the state issued $75 million in taxpayer-backed bonds to lure 38 Studios, a video game company owned by former Boston Red Sox pitcher Curt Schilling, to Rhode Island from Massachusetts. Two years later, the company filed for bankruptcy, leaving Rhode Island taxpayers on the hook to make good on the failed investment. By some estimates, the total cost associated with the failed investment has exceeded $100 million.
Earlier this year, the U.S. Securities and Exchange Commission filed charges against the state’s economic development agency, R.I. Commerce Corp. (formerly the R.I. Economic Development Corp.), accusing the state and bond underwriters of misleading investors. The lawsuit sparked renewed calls to stop state payment to bondholders, chiefly coming from Rep. Karen L. MacBeth, D-Cumberland, who introduced legislation to stop payments.
The call to stop payments, however, has largely been quashed by state leaders, including the governor, House Speaker Nicolas A. Mattiello, Senate President M. Teresa Paiva Weed and General Treasurer Seth Magaziner.
Fitch cites the state’s payments toward the bonds in fiscal years 2014-2916 as evidence of the state’s commitment. But warns that “failure to fully appropriate for debt service on moral obligation bonds that were originally issued by a state agency would lead Fitch to reassess the state’s commitment to bondholders and likely trigger negative rating action on the state’s [general obligation] and appropriation-backed debt ratings.
“Consistent with Fitch’s criteria for moral obligation pledges, Fitch does not anticipate moving those ratings below investment-grade as these moral obligation bonds were a project-specific commitment with limited direct state involvement,” according to the rating.
Last July, Moody’s Investors Services assigned a Aa2 rating with a stable outlook to the state’s general obligation bonds; Standard & Poor’s Rating Services assigned a AA rating with a stable outlook, according to the state’s website.

No posts to display