Moody's Investors Service on Monday cut the credit rating of Providence, Rhode Island, to Baa1 from A3, saying it is likely the city will have to borrow to pay for operations in the next fiscal year.
The credit ratings agency added that retirees could sue to stop the state capital city from blocking higher pension benefits and said that the city's credit outlook remains negative. Providence has a $20 million deficit in the current fiscal year that ends on June 30.
"The negative outlook reflects Providence's weak financial position and strained liquidity, despite significant structural improvements in fiscal 2012, as well as the low funding status and sizeable unfunded liability for the city's public safety pension plan," Moody's said.
Similar concerns about Providence's cashflow prompted Fitch Ratings on March 14 to cut the city's rating three notches to BBB.
Providence's mayor wants more contributions from some of the city's tax-exempt universities, colleges and health care centers, both credit agencies noted.
Providence, a city of 178,042 people, is home to Brown University, the Rhode Island School of Design and Providence College. "Although it is possible that additional revenue from newly negotiated payments in lieu of taxes will be secured prior to year-end, the primary strategy for closing the gap is the elimination of cost of living adjustments for retirees, which reduces the city's appropriation to the locally-funded pension system by $16 million but is likely to be challenged in court," Moody's said.
The credit agency said its downgrade affected $56 million of outstanding debt and the underlying rating on $247 million of bonds issued for schools through the Rhode Island Health and Education Building Corporation.
Another $258 million of debt issued by the Providence Public Buildings Authority and the Providence Redevelopment Authority was downgraded to Baa2 from Baa1.
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