Fitch Ratings dropped Providence's credit rating by three grades from A to BBB yesterday, putting the city only two steps away from junk bond status.
The city's downgrade follows similar declines for Woonsocket and East Providence, which have both had their bonds labeled junk status in the past year. Central Falls, which had its status lowered to Caa1 - indicating that the city's potential to default would continue to increase - in June, declared bankruptcy in July.
"Fitch's report is confirmation that Providence's fiscal crisis is real," said Providence Mayor Angel Taveras in a statement. The external review confirms the need for Providence to reform its pension system and ask for more from local nonprofits, he wrote.
Fitch issued the downgrade because of the city's $22 million budget deficit, said analyst Kevin Dolan, director at Fitch's Northeast region public finance group.
"There are no concrete solutions to eradicate that deficit at this time, and as far as the city's future outlook, they're looking at additional structural deficits, which could be difficult to overcome," Dolan said.
The city was placed under "negative outlook" roughly a year ago, Dolan said, meaning that the ratings agency would follow up within 12 months to determine a bond rating change.
Providence can expect higher interest rates on new loans in the future as a result of the credit downgrade.
The downgrade could push the city in one of two directions, said David Weil, professor of economics. As a result of increased interest rates in its future loans, Providence could spiral into more debt, or it could use the external review as a bargaining chip to improve city finances, Weil said. Fitch's rating gives legitimacy to the mayor's claim that the city's economy is in dire straits, Weil said. In January, Taveras threatened that the city could declare bankruptcy in June if serious steps are not taken to close its budget gap. "The Mayor's Municipal Review Board identified the full range of fiscal challenges facing the city, which have been years in the making," wrote Marisa Quinn, vice president of public affairs and University relations, in an email to The Herald.
"It makes total sense to me," said Anna Jouravleva '12, who spent the summer researching municipal and state pension plans in Rhode Island. Ratings agencies take four factors into account when evaluating a city's credit rating: debt level, government and management, local economic strength and the ability for the city to manage finances and raise revenue. But ratings agencies have traditionally ignored non-explicit debt, like pension liabilities, which make up the bulk of debt in Rhode Island towns and cities, Jouravleva said.
"It seems very, very short-sighted to me, the way city officials and government deal with the finances of their city," Jouravleva said. "There needs to be some really big change in the way that city officials plan their budgets and approach governance."
The credit downgrade may make it harder to bring businesses to the state, she said, since people may fear the city's bleak finances will translate to increased taxes.
Fitch will meet again with city officials to check in on their progress as the fiscal year comes to a close in June, but a public announcement may not be made, Dolan said.