Moody's Revises The City Of Providence's General Obligation Bond Rating To Baa1 From A.

NEW YORK--(BUSINESS WIRE)--Jan. 19, 1996--Moody's Investors Service announced yesterday that it has revised the rating on Providence's general obligation bonds to Baa1 from A, affecting $120,675,000 of debt. At the same time, the rating on the Providence Public Building Authority's bonds has been revised to Baa from Baa1, affecting $66,885,000 of debt. The revisions are based on the following factors.

Weak Finances Continue To Exhibit A Lack Of Operating Flexibility

The city's financial operations remain narrowly balanced following a modest surplus in fiscal year 1995. This surplus was achieved largely by deferring $9.8 million in pension payments across a ten-year repayment period that was to begin in 1996. The current fiscal year continues a trend of relying on one-time revenues to balance structurally weak financial operations. One-time revenues include a further deferral of the first year's payment of the pension deferral from the previous year. This continues a pattern of employing one- time revenue and expenditure measures that produce small operating surpluses but increase future costs.

To the credit of the current administration, difficult decisions have been made in cutting expenditures, including defunding of positions, pay and benefit concessions by unions, and privatization of certain services. A tax increase was proposed for the current fiscal year but not enacted by city council. It should also be noted that the dollar amount of one-time revenue fixes has declined in recent years.

Despite these measures, financial operations continue to exhibit an underlying lack of flexibility. The current problems illustrate a fundamental, and ongoing, imbalance in the structure of the city's financial operations in which recurring revenues have simply not been sufficient to cover expenditures. It is worth noting that property taxes, which provide over half of operating revenues, have not increased since 1992. This year's budget was initially delayed because of the inability to achieve consensus on the need for a tax increase. The budget was subsequently delayed until December because of a lack of agreement over the reliability of revenue projections. The failure to adopt the budget for nearly six months, and the inability to agree on revenues highlights the city's fiscal problems.

The lack of budgetary flexibility presents officials with a difficult challenge, as it leaves them with little room to deal with the considerable problems confronting them in the current fiscal year and in the near future. These problems, which could involve large sums of money, include a dispute on previous cost of living allowances, unsettled union contracts with fire and police personnel, a dispute over backpay for teachers, and budgeted but unrealized savings from fire department reductions. A further complicating matter is the likelihood of demands for pay raises by union personnel. A lack of adequate reserves increases the difficulty of meeting these challenges while officials also try to bring structural balance to the city's budget.

State Aid Remains A Significant And Uncertain Source Of Revenue

State aid continues to be a significant revenue source for the city, accounting for about 30% of operating revenues. Given the lack of financial flexibility in its financial operations, the city remains vulnerable to any potential fluctuations in this important revenue stream. As the state is faced with its own economic and fiscal difficulties, it is increasingly uncertain that state aid will continue at levels needed by the city. The recession of the early 1990s hit Rhode Island particularly hard, and the pace of economic growth in the state continues to lag behind the rest of the nation and the region. The state's economy is expected to remain weak relative to the U.S. throughout the decade. The state's current fiscal difficulties reflect this slow economic performance, with revenues in the current year running below projections. These problems have left the city vulnerable to possible cuts in state aid as the state attempts to balance its budget. The uncertainty of state aid is illustrated in the city's current budget in which the state cut education aid to the city by $5 million at the beginning of the year. This forced the city to begin the fiscal year with a $5 million gap. In addition, although the city budgets PILOT payments at the beginning of the fiscal year, it does not receive them until late in the year, making the budget vulnerable to late year cuts.

The Economy Of This Capital City Continues To Underperform 

Providence is the capital of Rhode Island, playing a large role in the economy of southeastern New England. A measure of stability is provided by state and federal offices, and this is complemented by a number of hospitals, academic institutions, and banks. Manufacturing, though declining, is still an important sector of the economy. A number of development projects have taken place in the downtown area in recent years; however, a good portion of this has not been taxable, so the tax base has not benefited correspondingly. Officials expect construction to begin soon on a large shopping mall that will be built in the downtown area. A tax deferral package will limit tax benefits for the city, but the mall will provide additional employment.

Despite these positive points, Providence continues to struggle with a number of long-term economic and social problems. The city has been particularly hard hit in recent years by the migration of jobs, population, and businesses to the suburbs and beyond. This exodus has left behind a stagnant tax base, and a poorer population to pay the rising costs of city operations and infrastructure improvements. Resident per capita income, which equaled the state level in 1969, fell to only 79% by 1989. Unemployment rates have been well above state and national averages in recent years, reflecting the decline in the city's manufacturing base.

CONTACT: Gary Mescher, 212/553-4133

Robert Stanley, 212/553-0334