Providence, Rhode Island’s capital, had its rating cut by Standard & Poor’s even as it seeks to repair its finances by overhauling an ailing pension system and extracting bigger voluntary payments from Brown University.
S&P lowered Providence’s credit grade one step to BBB, two levels above junk-bond status, citing “ongoing fiscal pressure” for retaining a negative outlook on the debt, meaning it could be cut again. The downgrade follows steps by Mayor Angel Taveras and the City Council to extract more cash from nonprofit organizations and lower pension costs.
“Though city management has taken numerous steps to enhance revenue and drastically cut or avoid expenditures in an attempt to restore structural balance, the city’s budget remains structurally imbalanced,” Matthew Stephan, an S&P analyst in Boston, said today in a report. He said another rating cut may be made if S&P believes Providence will enter bankruptcy.
Brown, the Ivy League school started in 1764, said it will boost the amount of payments in lieu of taxes to the city, agreeing to contribute $31.5 million over 11 years. The university already contributes $4 million a year, including $2.9 million in levies on property it has bought or leased since 2003, President Ruth Simmons said in a letter released today.
Agreeing on Payments
The university was the third nonprofit group in the city to agree in recent months to either begin making voluntary payments or increase the amount, according to the mayor’s office. The school began making the payments in lieu of taxes in 2003.
“Brown is deeply concerned about Providence’s financial situation and is committed to supporting efforts to enhance the city,” said Simmons, who is stepping down as president this year. She said the school received a pledge from Taveras and Governor Lincoln Chafee, an independent, to support its effort to expand in the city, which includes acquiring streets around the campus and leasing parking spaces.
Rhode Island and its cities have coped with lingering effects of the recession while the cost of benefits promised to public workers has consumed a growing portion of annual budgets. Central Falls, the state’s smallest city, entered Chapter 9 bankruptcy in August. Elected in 2010, Taveras said in February that Providence, the state’s most-populous municipality, was on the brink of insolvency.
The council passed an overhaul of Providence’s $422.8 million pension yesterday, cutting costs by almost $19 million a year largely by suspending cost-of-living increases to retirees that are as high as 6 percent for some former public-safety workers. While Taveras signed the measure, Paul Doughty, head of the local firefighters union, pledged a court challenge.
“It’s a huge mistake,” Doughty said. “If they lose this in court, almost certainly they will end up in bankruptcy. They’re playing a huge game of chicken.”
The city of about 178,000 is banking on the cuts to help balance its fiscal 2013 budget. Ending the automatic increases will save $15.6 million, according to a council report.
“It is uncertain at this time whether such savings will be realized,” S&P’s Stephan said, citing the “conjectural” nature of anticipated cost reductions.
Automatic pension increases may resume once the retirement fund has enough assets to cover 70 percent of promised benefits, according to the overhaul measure. Testimony at council hearings on proposed changes put the current level at 34 percent.
Another change caps pensions at 1.5-times the state’s median household income, which averaged about $54,900 over five years through 2010. No savings estimate from that move was provided in the report. The city pension serves 3,000 retirees and another 2,000 current workers, including police and firefighters, said David Ortiz, a Taveras spokesman.
The average city pensioner gets about $25,000 a year, Doughty said. The mayor said that a former fire chief who earned $63,510 the year he retired collects $196,813 annually now and that there are at least 25 retirees getting more than $100,000.
The overhaul will reduce Providence’s unfunded liability of about $900 million by more than $240 million, according to the council report. The larger figure represents the difference between what the city has set aside to pay for promises to retirees and the estimated cost of those future benefits.