Fitch Ratings has assigned an ‘A+’ rating to the Rhode Island Convention Center Authority’s (the authority) $72 million refunding revenue bonds, 2009 series A. The bonds, which are being issued to refund outstanding 2001 series A variable rate refunding revenue bonds and finance an associated swap termination payment, are expected by negotiation the week of March 9. Fitch also affirms the ‘AA-‘ rating on the state’s outstanding general obligation (GO) bonds and the ‘A+’ rating on the state appropriation-backed bonds listed at the end of this release, including those of the authority. The Rating Outlook is revised to Negative from Stable.
The Negative Rating Outlook reflects deterioration in Rhode Island’s economic performance and outlook in recent months in the context of an already severely strained financial position. Revenue and expenditure estimates were revised in November 2008, resulting in a projected current-year gap of about 11% of expenditures even though fiscal 2009 spending was already below fiscal 2008 levels. Although tax revenues are on forecast through January, collections have weakened and there is downside risk given the worsening in the economic outlook for the state and the nation since November. Assistance from the federal stimulus package will mitigate but not resolve the state’s budget challenges. The next forecast review is scheduled for May 2009.
The governor’s January 2009 proposal to resolve the now $370 million fiscal 2009 shortfall included steep current-year cuts to local aid, $95 million in pension reform savings that may be difficult to realize, a small amount of revenue increases (primarily in the cigarette tax), and $93 million in one-time measures, including $27.5 million in Medicaid funds assumed from the federal stimulus package. The governor is expected in the near term to submit a revised fiscal 2009 proposal that includes additional federal assistance from the enacted stimulus legislation. Rhode Island expects to receive more than $400 million in additional Medicaid funds through fiscal 2011 (about $130 million of those in fiscal 2009) and as much as $165 million in direct education aid, in addition to other assistance. Release of the governor’s budget for fiscal 2010, originally expected in early February, was delayed to mid-March to allow for consideration of the federal stimulus package; the budget will address a projected fiscal 2010 gap estimated at about $510 million.
Rhode Island’s recent economic performance has been amongst the weakest of the states and the trend is negative. The state has one of the most stressed real estate markets in the country, fueled by subprime delinquencies, and has lost jobs every month since August 2007. December 2008 employment was 4.5% below December 2007, compared to the nation’s loss of 2.1%, with declines in almost every sector. Unemployment in December 2008 stood at 9.4%, 131% of the U.S. rate. The pace of personal income growth also has been below that of the nation; 2007 personal income per capita equals 103% of the U.S.
The state’s two largest revenue sources, personal income taxes and sales taxes, continue to be weak, and the forecast of business corporation tax revenues also was sharply reduced in November. Personal income tax revenue is forecast to drop 5.8% in fiscal 2009 and sales and use taxes are projected down 1.7% for the year, following a decline of 3.2% in fiscal 2008. Overall, tax revenue is forecast down 4.6% in fiscal 2009 (6.7%, adjusting for the impact of tax policy changes). Tax revenue is then projected to grow 0.6% in fiscal 2010 (1.4% base growth). The November 2008 forecast reflects the state’s expectation that nonfarm employment will be down in both calendars 2008 and 2009 with slow recovery thereafter.
Rhode Island operates with a 98% constitutional appropriation limit and 3% reserve fund cap. These protections will be strengthened in the coming years as the state moves to a 97% appropriation limit and 5% reserve fund cap by July 1, 2012, pursuant to a constitutional amendment approved by voters in November 2006. The reserve has generally been fully funded, although audit findings subsequent to the end of fiscal 2007 resulted in an unexpected draw of $19 million, which was subsequently replenished, and the fiscal 2008 year-end deficit is expected to result in a draw of about $43 million.
Rhode Island’s debt ratios are above average but still in the moderate range. Net tax-supported debt of about $2 billion equals 5% of personal income. Pension funding levels are low. Additional pension reform is being considered in the current legislative session.
The ‘A+’ rating on the refunding revenue bonds is based on the credit quality of the state, as security for the bonds derives from lease rental payments made by the state, subject to annual appropriation. The rental payments are absolute and unconditional, not subject to abatement and not dependent on state occupancy or use of the leased facility. Additionally pledged is a first mortgage on the facility, and a debt service reserve fund.
The ratings on the following state appropriation-backed bonds are affirmed at ‘A+’. The Rating Outlook is Negative.
Rhode Island & Providence Plantations, State of RI:
–State lease participation certificates.
Rhode Island Convention Center Authority:
–Convention center and civic center revenue bonds.