April 20 (Bloomberg) -- Rhode Island plans to sell $118.5 million of general-obligation bonds as fiscal strains have led to downgrades for cities including Providence, the capital.
Proceeds from the sale will be used to buy back debt, according to an offering document. Providence, the biggest municipality in the smallest U.S. state, had its rating cut to two steps above junk grade last month by Fitch Ratings. Governor Lincoln Chafee has said that local finances are in crisis.
“The state’s persistent revenue under-performance and spending challenges” were cited by Moody’s Investors Service in a report yesterday, explaining its Aa2 rating on the bonds, third-highest. Moody’s also cited Rhode Island’s record of using one-shot solutions to balance its budget and short-term borrowing to maintain cash flow.
Treasurer Gina Raimondo, a Democrat, led an overhaul of the state’s pension in November to reduce its unfunded liabilities. She and Chafee, an independent, have pushed for similar changes in retirement plans for municipal workers. Central Falls, Rhode Island’s smallest city, cited its obligations to retirees when it entered bankruptcy last year. Providence is among five communities in fiscal distress, according to the governor.
“After three years of operating deficits, the city’s cash position is very weak and the current budget gap presents cash-flow problems during the final two months of the fiscal year,” Fitch said last month in a report on Providence. The company cut the city’s credit score to BBB, two steps above noninvestment grade, from A, three levels higher.
“We must reform our pension system, and our large tax-exempt institutions must do more to help the city and rebuild a strong fiscal foundation,” Mayor Angel Taveras, a Democrat, said in a statement issued in response to Fitch’s cut. Moody’s also lowered the capital’s rating in March to Baa1, three levels above junk, from A3, one step higher, citing fiscal strains.
“It’s a real crisis in Rhode Island,” Chafee said in an interview at a National Governors Association meeting in February. He named other distressed cities in the state as East Providence, Woonsocket, West Warwick and Pawtucket.
Fitch affirmed its AA rating, third highest, on the state’s general-obligation debt, citing improving revenue and “conservatively managed” finances in an April 18 report. While the pension changes have “significantly improved” the system’s health, the state’s 11 percent unemployment rate in February, second highest in the U.S., has kept its economy among the nation’s weakest, according to Fitch.
A Barclays Capital index of municipal debt issued in Rhode Island shows a year-to-date return of 2.35 percent through yesterday, compared with 2.71 percent for all such bonds.
The state expects to save about $8.2 million from refinancing older debt with the bond proceeds, according to Joy Fox, a spokeswoman for Raimondo.
Rhode Island last sold long-term general-obligation bonds in 2010, with a 10-year tax-free portion priced to yield 3.45 percent, according to data compiled by Bloomberg, or 0.29 percentage point more than a Bloomberg Fair Value index of top-rated debt. That index has dropped to 2.11 percent, the lowest in more than a month, and touched 1.88 percent on Feb. 6, the lowest since at least 1991, the data show.
Janney Montgomery Scott will lead banks marketing the offering, which is set to be priced next week.
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