Moody's Investors Service has revised the outlook on the State of Rhode Island to negative from stable and affirmed the Aa2 rating on the state's general obligation bonds. Concurrently, Moody's has affirmed the Aa3 rating on the state's appropriation debt and certificates of participation. The state has approximately $1.1 billion in outstanding general obligation debt and $640 million in outstanding appropriation debt and certificates of participation.
The Aa2 general obligation rating incorporates Rhode Island's institutionalized governance practices; maintenance of modest but positive general fund balances, including a fully funded budget reserve fund (BRF); narrow liquidity; and an economy that has long lagged the nation's. Even prior to the recession, Rhode Island faced persistent revenue under-performance and spending challenges. These were exacerbated by the downturn and by the state's practice of balancing its budgets with one-time solutions and increasing its short-term borrowings for cash flow purposes. The state appears poised to reverse these practices in its FY 2012 budget, which is likely to be adopted very close to the July 1 opening of its new fiscal year.
The negative outlook reflects the potential impact of rapidly escalating pension costs on the state's ability to increase its liquidity margins, diminish its reliance on one-time measures to balance its budget and reduce its debt burden. The state's pension costs are set to double in two years by an amount that roughly offsets its budget reserve account, raising the likelihood that it will continue to face significant budgetary pressures and fail to achieve the fiscal breathing room needed to sustain a financial position commensurate with other Aa2-rated states.
