Two rating agencies have state on negative watch

Two of the three major bond rating agencies have now placed the state of Rhode Island on “ratings watch negative,” although all three agencies have kept the state’s credit rating unchanged, R.I. General Treasurer Frank T. Caprio said last week.
“This is another clear signal that the rating agencies will be watching the state’s budget process with the expectation that structural changes will be made, as opposed to the quick fixes which were relied on in the past,” Caprio said.
The news follows the state’s issuance last week of $47.05 million in general obligation bonds, in a refinancing of existing debt that Caprio said is expected to save the state about $1.5 million in interest costs.
Fitch Ratings, which last week assigned a “AA” rating to the new bonds and maintained its “AA” rating on the state’s roughly $931 million in outstanding general obligation bonds, had downgraded the state to rating watch negative on Nov. 20.
Moody’s Investors Service has followed suit, assigning a rating of “Aa3” to the new bond issue and affirming its previous “Aa3” rating on the state’s outstanding general obligation bonds, but downgrading its outlook on all Rhode Island general obligation debt and certificates of participation to negative from the previous stable.
In their decisions, both agencies cited the state’s lagging tax collections, reduced revenue forecasts and projected budget deficits for fiscal 2008 and fiscal 2009. (The third major bond rating agency, Standard & Poor’s has an “AA-” rating on Rhode Island general obligation bonds.)
“In the past few years, Rhode Island has faced continuing revenue under-performance and spending challenges resulting in increasingly larger budget gaps,” Moody’s said in its report.
“The state employed one-time solutions to resolve its budget gaps in the recent recession, using tobacco bond proceeds – effectively … deficit borrowing – to balance its budgets in fiscal years 2002 and 2003. In fiscal year 2007, the state again relied on residual tobacco bond proceeds and a draw on the state’s budget reserve fund to close the year. Proceeds from the tobacco securitization were also incorporated in the enacted fiscal year 2008 budget. In addition, Rhode Island returned to cash flow borrowings in both fiscal years 2007 and 2008, reflecting the state’s reduced available liquidity.
“The latest projections show a budget deficit of $151 million in the current year and a substantially larger one ($383 million) for fiscal year 2009. Proposed solutions for fiscal year 2008 include further use of one-time resources to fill the gap.
“The proposed fiscal year 2009 budget relies heavily on reining in spending, which the state has been struggling with for several years. In addition, assumptions of an increase in sales tax revenue appear optimistic in light of recent performance and the state’s weak housing environment. These uncertainties raise concerns regarding the state’s cash margins, which are already slim, and the likelihood of achieving structural budget balance in the near term,” Moody’s said.
The report also listed several factors as credit strengths, among them the state’s relatively stable employment, debt reduction policies that have improved its debt ratios and the maintenance of a reserve fund that continues to afford Rhode Island some financial flexibility, Caprio noted. •