SOUTH KINGSTOWN – A special report released Monday by Moody’s Service Investors has ranked South Kingstown as top in the state for having the highest bond rating.
The financial rating agency noted “local governments in Rhode Island are experiencing economic weakness, revenue stagnation and pension expense growth that are more acute than in most other states and are likely to persist into the future. We expect few if any rating upgrades and a continuing trend of downgrade activity in the coming year.”
Major challenges facing Rhode Island local governments include declining property values, a state-imposed cap on property taxes at four percent, significant cuts in state aid, underfunded pension systems and a lagging economic recovery.
Moody’s lowered the bond ratings of nine Rhode Island communities this year. These included Pawtucket, Providence, Warwick, Central Falls, East Providence, West Warwick, Coventry, North Providence and East Providence.
South Kingstown, however, received a rating of Aa1, the second highest bond rating a municipality can attain. South Kingstown is only one of four Rhode Island communities that have a bond rating of Aa1.
Moody’s report evaluates cities and towns’ ability to pay their bond’s principal or interest in a timely manner. Bond ratings indicate to taxpayers how much their city or town will have to pay when it borrows money for projects like new roads and buildings. The higher the bond rating, the less a community will have to pay for bonds.
The town has been long noted for having a good bond rating. The town received its Aa1 bond rating in April 2010 and has been upgraded three times since 1952. It has been noted for its growing tax base due the development of South County Commons in 2005, its economic stability provided by the University of Rhode Island and South County Hospital and its stable reserves within the General Fund and strong reserve levels within the Capital Project Funds. South Kingstown is also recognized for having a favorable debt position with a low debt burden and rapid repayment schedule of principal.
Town Finance Director Alan Lord said South Kingstown is an outlier in the state amongst many of the financial challenges noted in the report.
Lord said the credit analysis is based on how much debt is outstanding in municipalities and how well they perform in accordance to their budgets. In South Kingstown, Lord said the town usually has an operating surplus between 10 to 15 percent in its fund balance, a goal the rating agency looks for cities and towns to attain.
The report also considers the amount of debt each city and town issues for capital projects to determine whether plans are affordable over time. On Dec. 2 the town issued its 2012-2013 through 2017-2018 Capital Improvement Program. In the CIP, Lord said the town is not issuing any new bonds until FY 2014-2015 until the economy recovers, a factor Moody’s rates as positive.
“Moody’s reviews indicated that South Kingstown is in good standing,” Lord said.
The capital projects reserved for FY2014-2015 will include road improvements, renovations to the Neighborhood Guild and school building improvements. The town reviews the CIP on a yearly basis to determine whether projects are needed sooner than later.
In November, the state signed into law the Rhode Island Retirement Security Act of 2011 to save the state from its $7.3 billion unfunded pension liability. While the state only has a 48 percent funded ratio, South Kingstown has a funded ratio of 92 percent.
“Eighty percent is considered adequate. We’re well above that benchmark,” Lord said.
Communities’ pension obligations has increasingly become a concern among rating agencies as states across the nation grapple with retirement costs. In Rhode Island, Moody’s said, pension obligations is a particular concern.
Other Rhode Island cities and towns pension systems are lagging due to what the report states are years of neglecting annual pension contributions and poor investment performance.
“While the growing cost of pensions is a source of stress for local governments across the U.S., it is reaching a crisis point for many Rhode Island local governments,” the report said.
Moody’s cited large salary and benefit packages for public employees and discount rates above actual investment performance used by towns as contributors to pension woes. The pension stresses are exacerbated in Rhode Island, the report says, by the fact that cities and towns are responsible for school budgets without having full control over school operations, such as being able to make line item cuts.
South Kingstown also participates in the state-administered MERS pension plan. Moody’s states that while locally administered plans allow cities and towns to underfund their pension systems, participation in the state plan enforces financial discipline because the state can withhold aid.
Twenty-four local pension plans are considered at risk by the state auditor general, the report cites. This includes Narragansett’s town plan with a 69.9 percent funded ratio.
With a tax levy cap at four percent, limiting the amount a community can raise each year, Rhode Island’s local governments are at a disadvantage, Moody’s says. The state is also weighed down by the highest unemployment rate in the nation and a slow population growth as people migrate to Massachusetts, Florida and Connecticut.
With a lagging economy, Moody’s predicts Rhode Island is at the highest risk in the country for falling back into recession. At a probability of 59 percent, the state is “the second most likely to fall back into recession within the next six months, trailing only Wyoming.”