Providence, R.I., Mayor Jorge Elorza said his city's three-notch upgrade from Fitch Ratings, to A-minus from BBB-minus, reflects a move in the right direction.
"We have a lot more work to do, but combined with our recent announcement of a large operating surplus, this is another positive sign," Elorza said late Thursday after Fitch's announcement.
Fitch cited revenue growth and spending controls, and its revised criteria for rating state and local government debt.
In addition, Fitch said its rating reflects the 2011 state law that gave Rhode Island city and town general obligation bondholders a statutory lien on property-tax revenues. Lawmakers passed it essentially to set up 18,000-population Central Falls for its Chapter 9 bankruptcy filing.
Central Falls exited bankruptcy after 13 months, in September 2012.
"Conceptually this means Fitch rates Providence at BBB based on default likelihood, but ups the rating to A-minus based on strong recovery prospects due to the statutory lien enjoyed by all Rhode Island cities and towns with GO debt," said Alan Schankel, a managing director at Janney Capital Markets.
Fitch also raised the 178,000-population capital city's issuer default rating to BBB from BBB-minus. This was the first review for Providence under the new criteria, in connection with its annual surveillance.
Fitch cited the city's fiscal 2016 combined surplus of nearly $9.5 million, including the $4.3 million budgeted surplus to reduce the cumulative deficit and the $5.1 million additional operating surplus. It also weighed structural changes in the fiscal 2017 budget, elimination of the risk of one-time revenues and the establishment of working groups to explore how to diversify city revenues.
The report called the rating sensitive to the city's ability to continue to address any budget imbalances, restore reserves to better levels, and maintain adequate financial flexibility.
"I am excited to see that Fitch has recognized our efforts," said Elorza, elected in 2014.
S&P Global Ratings and Moody's Investors Service rate Providence GOs BBB and Baa1, respectively.
S&P had revised its outlook to stable from positive in late May, while the City Council was deliberating the fiscal 2017. Elorza signs the $718 million spending plan the following month.
According to Fitch, Providence has high unfunded pension liability and other post-employment liability levels, but overall debt of $262 million, net of state reimbursement for projects, are at a low 4% of personal income.
Fitch said it expects no material change because of debt plans and a rapid amortization for principal that it considers manageable. The city expects to retire 74% of its principal within 10 years.
Providence's unfunded pension liability was $952 million as of July 1, 2015, based on the city's 8% assumed rate of return. Fitch pegged the liability at $1.1 billion using 7%. Assets, said Fitch, cover 27% of liabilities at 8%, 24% at 7%.
The city's unfunded OPEB liability was a "very high" $981 million effective July 1, 2014, said Fitch, amounting to roughly 15% of personal income or 8% of market value.
Many localities nationwide are struggling with high pension debt. "Rapid growth in unfunded pension liabilities over the past 10 years has transformed local governments' balance sheet burdens to historically high levels," Moody's said in a report on Friday.
Adjustments to the city's defined benefit pension plan, which took effect three years ago, and retiree health care restrictions have helped contain liabilities, though Fitch said employee-related salary expenses will continue to pressure the budget.
"Pension contributions are expected to continue to increase," said Fitch, "due to low funded levels for both the city administered plan and the state teachers' plan."
The City Council on Thursday night voted 8-4 to urge residents to vote against a proposed $40-million city infrastructure bond on Tuesday's ballot.
Elorza and the council have sparred over how to spend the money to improve bridges, streets, sewers and parks. Some council members want control over how to spend the money in their districts.
"It would add $40 million in debt to the people of Providence, which would create further financial hardship to the city," the resolution said. It invoked a Moody's report last month that further borrowing could trigger "downward rating pressure."
