By Michael McDonald
BOSTON - Rhode Island communities face more credit-rating cuts as the local economy declines, property values plunge and pension liabilities rise, Moody’s Investors Service said, citing sharper trends than in most states.
The growing cost of retirement benefits is “reaching a crisis point” for many of its local governments, Moody’s said in a report released Dec. 19. Rhode Island cities and towns operate their pension plans independently and so were excluded from a state law passed last month that suspended cost-of-living increases and lifting retirement ages for public workers.
“A lot of national negative trends are particularly acute in Rhode Island,” Naomi Richman, an analyst at the credit rating company in New York, said by telephone before the report was released. The company has a negative outlook on U.S. local governments, she said. The average debt grade for Ocean State municipalities, at A1, is a step below the Aa3 national median.
Rhode Island’s economy is among the weakest in the U.S., with unemployment at 10.4 percent in October, the highest level in New England and above the 9 percent national rate. There is a 60 percent chance that the state, which has cut aid to cities and towns by about $200 million in the past five years, will fall back into recession within six months, Moody’s said.
Plunging Property Values
Manufacturing provides less than 10 percent of the jobs in Rhode Island, down from 35 percent in 1970, and population growth has stagnated, Moody’s said. Home prices, which rose more rapidly than the national average before the financial crisis, have plunged almost 25 percent since the 2007 second quarter compared with more than 15 percent nationwide, Moody’s said.
Communities may end up collecting less property tax as values fall, Moody’s said. This year, the real estate tax base in Providence, the state’s capital and largest city, fell 14 percent, while the municipal pension had just 34 percent of the assets needed to meet projected obligations, the company said.
Moody’s, which rates $1.9 billion of debt issued by 32 Rhode Island municipalities, cut the general-obligation credit grades of eight. While none has defaulted on bond payments, Central Falls in August entered bankruptcy after property values plummeted and it was overwhelmed by pension liabilities.
The trend for 2012 is “likely to favor downgrades,” and there will be “few if any upgrades,” Moody’s said in the report. It also warned that a state oversight program, set up in June 2010 to help municipalities facing financial pressures, is untested and may be overwhelmed by multiple simultaneous requests for assistance.