“Providence’s total unfunded liability for pension and OPEB will be reduced to $2.1 billion, or 20.7% of its property tax base, still one of the largest unfunded liabilities in the state, exceeding those of the financially distressed cities of Central Falls and Woonsocket,” Moody’s analysts Vito Galluccio and Geordie Thompson write in a report Tuesday. (OPEB stands for other post-employment benefits, primarily retiree health care.)

To demonstrate their point, Galluccio and Thompson put together this chart:

R.I. Superior Court Judge Sarah Taft-Carter’s March 11 ruling on the fairness of the deal “is a credit positive for Providence because it signals that the court is likely to approve the pending agreement,” Galluccio and Thompson write. If the deal wins final approval on April 12, it will reduce Providence’s unfunded pension liability by $196 million and its unfunded OPEB liability by $400 million, according to Moody’s.

Providence spent more than a quarter of its budget on pension contributions, retiree health benefits and debt payments in the 2011-12 fiscal year, Moody’s notes.

• Related: Chart: The decline and fall of the Providence pension system (Jan. 25, 2012)

“The shortfall is credit negative as the city’s financial position has weakened considerably over the past four years,” Moody’s analyst Vito Galluccio wrote in a note to investors. “However, its balanced budget for [fiscal] 2013 indicates some progress toward restoring fiscal stability.”

Galluccio cited two big drivers of the $15 million operating deficit: Taft-Carter’s mathematically flawed ruling last year that the city didn’t need to move its retirees to Medicare, and various types of tax revenue failing to meet the city’s projections. The deficit would have been even larger if the city hadn’t shorted its 2012 contribution to the Providence pension fund by $5.4 million, he said.

“The 2012 results follow several years of operating deficits that have left the city in a precarious financial position,” Galluccio said. He blamed the fiscal crisis on a $125 million reduction in state aid during former Mayor David Cicilline’s second term and “rapidly growing expenditures related to employee salaries and benefits.”

The balance in Providence’s reserve account fell into the red in the 2011-12 fiscal year, with a negative $11.4 million balance as of June 30, 2012:

On the bright side, Galluccio said “the city has made significant progress toward reducing the $110 million budget deficit that it faced at the beginning of 2012.” He highlighted union and retiree concessions, cuts in school spending, increased property taxes and increased payments from local nonprofits. He also praised the Taveras administration for making its full pension contribution, balancing the budget and avoiding borrowing in fiscal 2012-13.

“Still, the trend of annual operating deficits have dug an accumulated deficit, leaving [Providence] with little room for error in the event of future operating pressures,” Galluccio added.

In a separate analysis, Galluccio praised the successful effort by the Chafee administration and U.S. Sens. Jack Reed and Sheldon Whitehouse to win permission for North Providence and East Providence to shore up their underfunded pension plans by using Google’s payment in a legal settlement.

In a research note, Moody’s analyst Tom Compton praised the tentative settlement on pensions and retiree health benefits that Taveras has negotiated with the city’s unions and retired workers. The police and fire unions, as well as the two department’s retirees, have all voted to approve the deal.

“The changes offer significant relief to the highly leveraged and fiscally stressed city,” Compton wrote. It will reduce the fixed costs – pensions, retiree health benefits and debt service – that made up about 22% of Providence’s operating-fund spending in 2011-12.

“Approval of this settlement marks another achievement by Providence in altering existing contractual agreements with active employees and retirees,” he wrote. “We expect it to set a precedent that other struggling Rhode Island cities and towns can follow.” He called the Taveras administration’s process of negotiating under court oversight “an effective tool to manage the rapidly growing expenditures.”

“The ability to reduce the [pension] liability will be critical to the city’s long-term credit strength,” he said.

The deal “will provide immediate and long-term budgetary relief” to Providence even though the reductions “are significantly less severe” than those ordered in Central Falls, according to Compton. It will reduce annual pension costs by 25% and annual medical benefit costs by 13% from the previous year’s level.

Moody’s pegged the 2012-13 savings from settlement at $22.5 million: $18.5 million from the pension changes and $4 million from the retiree health changes. The deal will reduce the city’s unfunded pension liability by $170 million, or 19%, and cut medical costs by $40 million over the next decade. Moody’s did not estimate the reduction in Providence’s unfunded liability for retiree health care.

​(chart: Moody’s Investors Service)

The 2012-13 state budget Governor Chafee signed into law last week will help Rhode Island municipalities and school districts by providing $34 million in new education funding, Moody’s Investors Service says.

The nearly 4% hike in state aid for K-12 schools is the third annual increase in a row and “a credit positive for both school districts and for cities and towns,” Moody’s analysts wrote in a research note Tuesday. “State funding for education now stands at over $900 million, well above the pre-recession peak,” they said.

However, Moody’s said the impact isn’t uniform across the state because of the new school funding formula. Barrington will get the biggest increase in education aid in 2012-13 at 42%, while the Chariho school district will suffer the biggest drop, losing 14%. Non-education aid will be flat after plunging since 2007.

Moody’s also noted lawmakers’ $2.6 million appropriation to offset some of the deep cuts in Central Falls’ pension benefits will help that city emerge from bankruptcy, but expressed concern about the failure of a proposed supplemental tax sought by cash-strapped Woonsocket.

The failure to enact any laws to stabilize the 36 locally run pension plans also drew concern. “Members of the legislature have publicly stated that they intend to take up local pension reform, but the delay into the next legislative year highlights the significant political hurdles they’ll have to surmount,” Moody’s wrote.

(chart: Moody’s Investors Service)

“Gov. Chafee, Treasurer Raimondo, Senate President Teresa Paiva-Weed and House Speaker Gordon Fox have recently expressed to us directly their support for the moral obligation commitment based on the state’s credit,” Moody’s analyst Marcia Van Wagner said in a research note.

Separately, Helen Foulkes announced her resignation as vice chair of the R.I. Economic Development Corporation’s board. Foulkes, a well-respected executive vice president at CVS Caremark, was put on the board by Chafee after she served on his transition team.

“I have discussed with the governor his plans for the board at the EDC, and I think it is best at this time I resign,” Foulkes said Thursday afternoon in a statement distributed by CVS. “I wish him good luck in this very difficult challenge.” Foulkes declined a request for an interview.

Foulkes’ resignation is another blow to the reeling EDC, which lost its executive director last week when Keith Stokes, the architect and chief cheerleader for the 38 Studios deal, resigned after the company’s financial troubles emerged. William Parsons is serving as its interim leader for now.

The EDC sold “moral obligation bonds” in 2010 to finance 38 Studios. “While they are endeavoring to resolve the situation with Studio 38 [sic] so as to avoid the need for further state support, if it is necessary to pay the bonds they will ensure that the state’s moral obligation pledge is fulfilled,” Van Wagner continued.

Moral obligation bonds are different from the more familiar general obligation bonds because with the former a state only pledges to ask lawmakers to appropriate taxpayer money to pay bondholders, while with the latter the state promises to pay. Rhode Island “has historically lived up to its moral obligation pledge, and we expect would do so in this case,” Van Wagner said.

The EDC borrowed $30 million in 1993 on behalf of biopharmaceutical company Alpha Beta Technologies, and the state paid off bondholders in full after Alpha Beta defaulted in 1999, partly by selling off a facility now used by Alexion Pharmaceuticals, Van Wagner noted.

The state also stepped in after defaults by the Fairmont Foundry and a project financed by the R.I. Industrial Recreational Building Authority, but in 2005 Governor Carcieri declined to seek money to deal with a bad real-estate investment made by the state pension guaranteed by EDC, Van Wagner said.

Under the EDC’s 2010 agreement with 38 Studios, the company promised to use revenue from its games to pay off the $75 million in EDC bonds, plus interest, by 2020. The total bill for principal and interest is $112.6 million, though $23.4 million was set aside from the bond proceeds in case the company couldn’t pay.

Moral obligation bonds are commonly “used to support debt issued for essential public purposes, such as public hospitals, universities, housing projects, or schools,” although they are sometimes issued for economic-development projects such as the 38 Studios relocation deal, Van Wagner wrote.

If 38 Studios defaults, Chafee will be forced to ask lawmakers for money to pay bondholders during next year’s legislative session, according to Moody’s. The bondholders are supposed to receive interest payments each May 1 and principal-plus-interest payments each Nov. 1 starting next year. The initial payments are interest-only and are being paid for with proceeds from the original bond sale.

“Once the appropriation request is submitted [by the governor] to the legislature, the state’s legal obligation has been met and the legislature may decide not to appropriate the funds,” Van Wagner explained. Some analysts have suggested the General Assembly should consider defaulting on the bonds altogether.

More coverage of the 38 Studios crisis:

• Two other 38 Studios subsidiaries also registered in Del., not RI (May 24)
• Schilling links to leaked ‘Copernicus’ art – ’38 isn’t dead yet’ (May 24)
• Schilling holds onto job as ESPN analyst amid 38 Studios woes (May 24)
• As Delaware firm, 38 Studios may be ineligible for RI tax credits (May 23)
• The Globe’s Kirsner lays out the likely endgames for 38 Studios (May 23)
• 38 Studios loses CEO and high-profile VP, LinkedIn suggests (May 23)
• Seven of EDC’s current directors voted to OK 38 Studios deal (May 23)

(graphic: Moody’s Investors Service)

“The ordinance is a credit positive because it provides current and future year budgetary relief to the financially strained city, although labor unions are likely to challenge the new law since it conflicts with existing collective bargaining agreements,” Moody’s analysts Susan Kendall and Geordie Thompson wrote Tuesday in a note to investors obtained by WPRI.com.

The pair described the pension overhaul as another sign that Mayor Angel Taveras and the City Council are taking difficult steps to avoid bankruptcy, saying it “demonstrates city management’s strong willingness to cut its long-term obligations despite resistance from employee groups and the threat of litigation.”

They also noted that last week Taveras reached deals with tax-exempts Brown University and Lifespan for an additional $33.9 million worth of payments over the coming years, which the administration “projects … will bring its 2012 and 2013 budgets into balance, although its reserve position and liquidity will remain weak.”

Local judges are a major concern for Moody’s. The analysts singled out R.I. Superior Court Judge Sarah Taft-Carter’s February decision barring Providence from moving retirees to Medicare as a key cause of its renewed fiscal distress in recent months, and said the outcome of any pension litigation will be significant.

“Providence’s ordinance marks the first time that a Rhode Island local government has altered existing contractual agreements with retirees outside of Chapter 9 bankruptcy,” which Central Falls used to make changes, Kendall and Thompson wrote. “If the ordinance survives a legal challenge, many other Rhode Island local governments may pass similar actions that reduce benefits to manage their own significant fiscal stress.”

“A large proportion of Rhode Island local governments are facing fiscal stress related to growing pension benefits,” they added. “The ability to alter pension benefits outside of bankruptcy would be a significant tool for municipalities to balance financial operations. This could also reduce the growing need for state intervention.”

The General Assembly is currently considering a package of bills proposed by Governor Chafee and backed by most local leaders that would allow troubled city and town governments to reduce their expenses, notably by freezing cost-of-living adjustments (COLAs) if their pension plans are underfunded.

Woonsocket, Providence and Central Falls face by far the largest combined pension and debt liabilities as a share of their property tax bases, according to this accompanying chart from Moody’s.

• Related: Moody’s joins Fitch, cuts Providence’s bond rating over budget (March 27)

(chart: Moody’s)

Payments in lieu of taxes, or PILOTS, “represent a potential revenue boon for local governments with high concentrations of tax-exempt properties in their tax bases, many of which are in the Northeast,” Moody’s analysts wrote in a research note Tuesday that singled out Boston as a successful example.

“Though far from immanent, greater PILOT revenue comes with long-term risks for some local governments should PILOTs grow so large that they impair not-for-profits’ ability to create jobs and stimulate the economy, or encourage them to move elsewhere,” Moody’s said, adding: “In general, local governments are still far from that tipping point.”

“Efforts by local governments to bolster PILOTs appear to be shaping into a trend,” according to Moody’s. In addition to Providence and Boston, Scranton, Pa.; Worcester, Mass.; Framingham, Mass.; and Newton, Mass., have all sought larger voluntary payments recently.

Mayor Angel Taveras wants Providence’s seven big tax-exempt organizations to pay the city $7.1 million more a year. Brown University has resisted his push to up its contribution by nearly $4 million, and the hospitals – which currently contribute nothing to Providence’s budget – have said little about whether they’ll play ball.

In Boston, tax-exempts have boosted their PILOTs by 24% over last year’s amount in response to Mayor Tom Menino’s request for an increase of more than $6 million. The largest payment last year came from Boston University, which paid $5.08 million, or 8.8% of what its tax bill would be.

A notable difference between Boston and Providence is the different attitudes of their hospitals.

Partners Healthcare, which owns $2.8 billion in tax-exempt property, paid Boston $4.34 million in 2010-11, or 5% of what its tax bill would be. Lifespan, which owns nearly $1 billion in tax-exempt property in Providence, would pay the city more than $1 million if it contributed at the same rate as Partners.

Lebanon, N.H., gets more than 5% of its budget from PILOT deals, Moody’s said, while Princeton, N.J., gets nearly 2% of its tax revenue from PILOTs and New Haven, Conn., gets more than 1% of its general fund budget from them. Providence wants to fund about 1.5% of its $614 million budget with $9.1 million from the tax-exempts this year.

While more money from tax-exempts would be a “credit positive” for local governments, Moody’s said municipal leaders need to balance that against the possibility that siphoning off more from them will hurt their economies.

“In many regions of the U.S., research universities and academic medical centers are the largest employers and also promote economic development through startup company spinoffs,” Moody’s said. Providence’s seven biggest tax-exempts employed 20,837 workers in 2011, which was 19.5% of total employment. Brown is the city’s largest employer.

“Placing a greater PILOT burden on these entities could reduce their financial and operating strength and ultimately reduce the employment and economic benefits they could create in the future,” Moody’s said. In Brown’s case, the university is projected to run a $9.4 million budget deficit next year, the school said Saturday.

Moody’s downgraded Providence’s credit rating last March and expressed concern earlier this month about the city’s deteriorating financial outlook. Taveras on Wednesday is expected to announce a deal with Johnson & Wales for higher payments and meet again with Brown’s president. He will sit down with the hospital CEOs on Friday.

• Related: At-a-Glance: How much Providence’s tax-exempts own and pay

(photo: Brown University)

In a report issued Tuesday, Moody’s said Superior Court Judge Sarah Taft-Carter’s injunction barring the $6 million in Medicare savings puts in jeopardy “a relatively small, but important component” of the city’s balanced budget plan. Taft-Carter argued the “alleged savings would not save the city from financial ruin.”

Moody’s, which downgraded Providence’s credit rating to A3 with a negative watch last March, called the ruling a “credit negative” for the capital. Taveras said the Medicare decision has the city on “the brink of bankruptcy.” The Rhode Island Supreme Court may decide Thursday whether to allow an expedited appeal by the city.

(Moody’s analyst Susan Kendall used Providence’s original $11.6 million estimate of the Medicare savings, which has since been cut to $8 million because of penalties the city must pay to sign the retirees up. Of that amount, $6 million is now in question for the police and fire retirees who sued.)

“Stagnant revenues and mounting pressure from city and school expenditures have driven [Providence's] annual budget deficits, resulting in a sharp decline in reserves,” Kendall wrote. She said the main reason the city didn’t start the year with a cash flow shortage was its decision to borrow money.

Kendall singled out former Mayor Buddy Cianci’s last years in office, along with market losses in 2002 and 2008, as key drivers of the city’s ballooning $901 million unfunded pension liability. “The city greatly underfunded its local pension system from 1998 through 2003, shifting the burden to future years,” she said.

Kendall added that “state oversight could be an option” for Providence because of its lack of cash reserves. Central Falls, which filed for bankruptcy last August, and East Providence are already under Fiscal Stability Act oversight. She also expressed concern about Woonsocket’s finances.

(chart: Moody’s Investors Service)

Since Warren penned those words, Rhode Island has passed the most sweeping pension overhaul in the nation, boosting its funded ratio from 48% to 60%. Illinois’ funded level, meanwhile, has dropped to 43%, and Bloomberg moved this story Monday (emphasis mine):

Illinois had its general-obligation bond rating reduced by Moody’s Investors Service to A2 from A1, making it the company’s lowest-graded U.S. state.

The downgrade to the sixth-highest rating came after a legislative session that “took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays,” Moody’s said in a report. Illinois, it said, has “weak management practices.”

Looks like Warren will have to seek solace somewhere else.

(photo: Alexander Gardner, via Wikipedia)

Moody’s Investors Service said Thursday it has begun a review of Woonsocket’s credit rating – already at junk status – and warned of the potential it may be downgraded again. The announcement comes less than a month after Fitch Ratings, which rates Woonsocket one notch above junk, put a negative outlook on the city.

Woonsocket Mayor Leo Fontaine told WPRI 12 last month his city’s financial circumstances are “very tenuous.”

“The state continues to watch the situation in Woonsocket closely,” Christine Hunsinger, a spokeswoman for Governor Chafee, told WPRI.com on Friday.

The announcement from Moody’s came the same day Governor Chafee convened a summit of municipal leaders to discuss what he termed the “crisis” facing Rhode Island’s cities and towns. Moody’s said the review was a response to the news that the Woonsocket schools finished the 2010-11 fiscal year with an unexpected deficit.

“While the city has undertaken meaningful steps to eliminate its accumulated deficit and stabilize its financial position … continued deficits in school operations has put Woonsocket’s finances under considerable pressure,” Moody’s said. “In addition, the city continues to underfund its local pension plan.”

The rating agency said its review will examine Woonsocket’s 2010-11 audit and evaluate “the city’s financial and liquidity position, its deficit reduction strategy, and possible intervention by the state.” Central Falls and East Providence are the only two cities whose finances are currently under formal state oversight.

Moody’s warned last month more municipalities are likely to see their credit ratings downgraded, particularly those with one of the 36 locally run pension plans that were left out of last year’s law. Many of them are deeply underfunded, including Woonsocket’s.

The firm’s analysts put the odds of a double-dip recession in Rhode Island at 49% as of December, a big decrease from the 59% probability they projected in November.

The only states more at risk of recession as of December are Connecticut (70%) and Wyoming (54%), according to Moody’s. Massachusetts has a 44% likelihood of a double-dip, and the odds for the U.S. economy as a whole are 34%. The least likely place to have another recession is Washington, D.C., at just 5%.

Moody’s updated its Risk of Recession Index on Dec. 19, the same day the firm’s credit analysts released a report on local pension plans in Rhode Island that cited the 59% probability of a double-dip in the state as of November.

The index uses eight economic metrics to offer “a leading indicator of a region’s economic performance,” Moody’s says. “Turning points in the probabilities suggest a slowing or acceleration in a region’s economy activity.”

(image: Televisual)

By Ted Nesi

PROVIDENCE, R.I. (WPRI) – The expert hired by the state to forecast Rhode Island’s economic future offered a grim outlook on Friday – and then warned them it may be too optimistic.

“The risks of going into a second recession are uncomfortably high” despite “some mild cause for optimism,” Zachary Sears of Moody’s Economy.com told a group of frowning state budget officials as he presented his twice-a-year economic forecast at a Statehouse hearing.

What’s holding back Rhode Island’s job market at this point are ongoing layoffs in the public sector, particularly by cash-strapped local governments, Sears said. Manufacturing has not bounced back as robustly in the state as it has in the Midwest, he said.

Rhode Island’s snail-paced recovery from the Great Recession is frustrating state officials from Gov. Lincoln Chafee on down. Treasurer Gina Raimondo recently described the state’s jobs crisis as “a monumental challenge.”

Read the rest of this story »

The Raimondo-Chafee pension bill is winning support on Wall Street.

Passage of the proposed retirement overhaul “would be credit positive for Rhode Island,” Marcia Van Wagner and Baye Larsen, senior analysts at Moody’s Investors Service in New York, wrote Monday in a research note. In June, the agency kept its rating on the state at Aa2 but lowered its outlook to negative.

“The reforms are more far-reaching than those recently adopted by many states that change benefits [only] for new members and increase employee contributions,” Wagner and Larsen wrote.

The legislation would slash the state government’s share of the state-run pension system’s unfunded liability in half, from $5.5 billion to $2.8 billion, and reduce the state’s required deposit to the pension fund in 2012-13 from nearly $400 million to about $200 million.

“This cost reduction would provide considerable budgetary relief to the state, whose economic and fiscal challenges pre-date the recent recession,” they said. Reamortizing the state’s pension shortfall over an additional six years mean it “will continue to be poorly funded for an extended period,” not hitting 80% until 2030, they said.

If unions and retirees challenge the changes in court, “Rhode Island will join a host of other states embroiled in litigation over efforts to reduce pension benefits for current employees and retirees,” according to Moody’s. Others include New Jersey, Colorado, Minnesota and South Dakota.

Notably, Moody’s referred to the pension bill as “the governor’s reform package,” a quite different take from The New York Times, which made no mention of Chafee in a 2,500-word story on Rhode Island’s pension debate that ran Sunday.

(chart: Moody’s Investors Service)

And now Moody’s is warning that the federal government won’t be the only entity affected, Bloomberg reports:

At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.

An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action. …

It didn’t provide a total value for other state and local credits that may be affected, including housing authorities and nonprofits. …

Issuers that are partially dependent on the federal government, such as states receiving Medicaid matching funds, also will be reviewed for vulnerability.

Rhode Island isn’t rated Aaa by Moody’s, so it’s not clear to me whether the state’s rating would be lowered in the event of a U.S. downgrade. The quasi-public agencies could be affected – the Rhode Island Clean Water Finance Agency is rated Aaa, for example.

No city or town in Rhode Island was rated Aaa as of March 17, according to a Treasurer Raimondo’s office. The municipalities with the best ratings were Barrington, Middletown and South Kingstown, all rated Aa1 (one notch below Aaa).

On a brighter note, Dow Jones Newswires reported earlier this week that the bond market has shown no signs of concern in response to the latest reports of financial distress in Central Falls and elsewhere here:

So far, no significant trades have taken place in any Rhode Island debt, both from the state itself as well as its cities and towns, said Dan Berger, senior market strategist at Thomson Reuters Municipal Market Data. …

The state’s 10-year debt trades at yields around 3.17%, 47 basis points above triple-A rated state debt, Berger said. The latest trading levels are little changed from the state’s year-average spread of 46.1 basis points. The state has the ninth largest spread of all states tracked by MMD.

Rhode Island bonds haven’t moved much because there’s very little debt outstanding, both on a state and local level. Fewer bonds usually means less trading, and therefore less volatility in prices.

Rhode Island has about $2 billion of tax-supported debt outstanding, according to MMD data, a pittance compared to California’s roughly $90 billion in general obligation bonds and New York’s approximately $60 billion in debt.

(photo: CoinCircuit.com)

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 FY2012 budget, which is likely to be adopted very close to the July 1 opening of its new fiscal year.

Governor Chafee’s budget proposal did indeed seek to reverse those practices. But doing so partly depended on enacting his sales tax proposal, and it remains to be seen whether legislative leaders will follow his lead when they release their revised proposal.

For what it’s worth, Moody’s has been a rare source of support for the Chafee administration’s fiscal policies. In March, the agency heaped praise on his MAST Fund proposal that aims to shore up underfunded local pension and retiree health plans, which the governor’s office happily trumpeted.

Speaking of the budget, House Finance Chairman Helio Melo and his Senate counterpart Daniel DaPonte “are working diligently every day” to complete it, House spokesman Larry Berman told me this afternoon. They’re fleshing out the details together while working out the big issues with their respective leaders, Gordon Fox and M. Teresa Paiva Weed, he said.

The revised budget must be posted online at least 48 hours ahead of a committee vote, so the soonest it will be made available is Wednesday to prepare for a Friday roll call, Berman said. But it didn’t sound likely the budget will be done that soon – we’re more likely to get it sometime next week.

That’s the question I had after seeing this chart in the new Rhode Island economic forecast released by Moody’s Economy.com as part of the Revenue Estimating Conference. It shows the change in consumer prices – that is, inflation – since 2000 for Providence, Boston and the U.S.:

For the last decade (at least), the cost of living has been rising faster in Providence than in nearby Boston or nationwide. While the cost of some individual item may be lower here, prices overall have increased about 33% since 2000 in Providence, compared with 27% in Beantown. Why would that be?

Probably because of rents, according to Zach Sears, Economy.com’s new Rhode Island analyst.

“Providence has had a relatively low [rental] vacancy rate, meaning a tighter market, and this would push up rents,” Sears told me in an e-mail. “This was particularly true in the first half of the last decade, when demographics were more positive and the housing stock was not growing much. This dynamic changed in the second half of the decade, as out-migration turned negative and the housing stock started growing faster, easing these pressures, and vacancy rates increased.”

That makes sense. Rhode Island saw the second-largest increase in the cost of renting a two-bedroom apartment over the last decade, behind only Hawaii, according to a study released earlier this month by the National Low-Income Housing Coalition. A household needs to make $39,853 a year – $19.16 an hour – to cover the $996/month fair-market rent for a two-bedroom in Rhode Island, the study said.

Sears’ analysis is also worrying because the rental vacancy rate in Rhode Island has dropped sharply since 2009, and a tighter market could mean higher rents, as I mentioned back in February. And the same trend is expected to be seen across the U.S., Bloomberg News reported last week:

Apartment rents and occupancies are likely to continue to rise as the U.S. home and labor markets remain depressed, economists said at a conference sponsored by investment-advisory firm Bentall Kennedy. …

U.S. apartment vacancies dropped to the lowest in almost three years in the first quarter as the weak homebuying market fueled demand for rentals, according to Reis Inc. …

An estimated 4 million to 4.5 million people per year in their 20s and early 30s are entering the housing market at a time when 28 percent of American homeowners with mortgages owe more than their houses are worth, Poutasse said yesterday at the conference in Vancouver. So-called echo-boomers desire mobility and see properties with negative equity as a hindrance to selling and moving elsewhere, he said.

“This generation isn’t going to behave the same way with housing,” Poutasse said.

Markets trembled on Monday (or did they?) when Standard & Poor’s, one of the big three ratings agencies, lowered the federal government’s credit outlook to “negative” out of concern that policymakers won’t reach agreement on how to stop the national debt from increasing.

Such a forecast is old news around here. S&P cut Rhode Island’s credit outlook from stable to negative way back in March 2009, more than two years ago.

Eleven states have the same first-class AAA credit rating as the federal government, at least in S&P’s judgment, but Rhode Island isn’t one of them, according to a Treasury roundup from Dec. 31.

Fitch Ratings, like S&P, has a negative outlook on Rhode Island. Moody’s is a bit more optimistic, putting the state’s outlook at stable. And it appears both Moody’s and Fitch raised the state’s rating one notch sometime in the past year, though I don’t remember when that happened. (I asked Treasury for more information.)

Here’s how the three agencies judge Rhode Island’s creditworthiness on their 10-point scales for investment-grade bonds.

- Standard & Poor’s. Rating: AA (#3). Outlook: Negative.

- Moody’s. Rating: Aa2 (#3). Outlook: Stable.

- Fitch. Rating: AA (#3). Outlook: Negative.

Update: Treasurer Gina Raimondo’s spokeswoman, Joy Fox, says Rhode Island’s credit ratings went higher because of a technical change at Moody’s and Fitch. “Last year, Moody’s and Fitch recalibrated to a ‘universal’ rating system applicable to all debt (public and private) and readjusted Rhode Island’s ratings accordingly,” Fox said in an e-mail.

(logos via ERM Strategies)

Is an increase in the sales tax a dagger aimed at the heart of Rhode Island’s economy? A prudent way to raise tax revenue and pay for other priorities? Neither? Both? How much would a $165 million tax increase actually affect the state’s $45 billion economy?

To get some answers, I gave a call to Andres Carbacho-Burgos, an economist with Moody’s Economy.com who has been tracking Rhode Island’s economy for years and whose forecasts are used by state budget officials. The transcript has been lightly edited for clarity.

I know it’s not your job to recommend specific policies, but it is your job to understand them. So I wanted to ask, what sort of economic impact would your models expect from a $165 million increase in state sales tax revenue? How big a deal would it be?

You need to look at more dimensions than just simply the volume of revenue received.

The theory behind Governor Chafee’s plan and some other proposals is that you try to lower the overall sales tax rate but you make up for the lower rate by broadening the base, by including services and possibly some Internet sales as well. So everything depends — well, I wouldn’t say everything — but a lot depends on how exactly you increase sales tax revenues.

I would say for Rhode Island households at the median income or below, something which substantially reduces sales tax rates would of course be beneficial to them. It would leave them with somewhat larger real income, and so that would help them out. The overall effect on total spending depends on the overall redistribution of the sales tax burden over the entire population of households in Rhode Island.

Now, have you done any modeling, or were you asked by the state to do anything, at Moody’s Economy.com on how this would impact our somewhat slow recovery here in Rhode Island?

No, we have not been asked by the state of Rhode Island to do any modeling on alternative sales tax proposals. What we do for them is we provide a semiannual estimate of income growth based on no major changes to tax policy.

I was reading your chief economist Mark Zandi recently explaining how in some cases cutting spending is worse than raising taxes because the multiplier on spending does more for the economy than the lower tax rates do. How should people be looking at that – the question of weighing those alternatives – in terms of the economy?

That’s a complicated question, but a brief shorthand is whenever you raise taxes or cut spending, you should look at the multiplier effect, in terms of figuring out who bears the brunt of those higher taxes or reduced spending and what is their tendency to spend over the economy.

The theory is that if you raise taxes on, say, the top 1% of income earners – either at the national level or at the state level – the impact on the economy will be less because the top 1% spend a much smaller share of their total income, and they save and invest the rest. So by raising taxes on the top 1%, the theory is you would cut more into savings, which don’t matter immediately in the short term, but you would cut less into private spending.

When you’re looking at the different ways for increasing tax revenue, though, the sales tax is actually fairly regressive, and it hits households across the board. What about that aspect of it?

Other things being equal, if you raise the effective sales tax rate – and by effective I mean not just the nominal sales tax rate, but the fraction of sales tax payments out of total personal income – then, because it’s regressive, that will have a more serious effect on spending than if you raised income taxes on the top income brackets.

And, just to be clear, that is what was going to happen here, although the politics is in flux. Although the nominal rate was going down, the governor wanted to add a 1% tax and more items at the standard rate to net $165 million more in revenue out of the sales tax. So would he be talking about taking more out of spending then?

Yeah, but again – just to hedge my position here – a lot of that depends on where the additional broadening of the sales tax base would take place – if it would be a broadening into services which the average household never uses. For example, if you impose a sales tax on large-scale financial services, then the burden on spending for that particular broadening would be very small as far as households in Rhode Island are concerned.

So yes, it’s true that other things being equal, an increase in the effective sales tax rate is more regressive and therefore hits spending harder than income tax rates. But you also have to be careful to look at what the structure of the change in the sales tax looks like.

So it sounds like the bottom line is it’s very important to look at the domino effect and the way all these ideas impact each other. You can’t just say raising the sales tax is bad or raising the sales tax is good – you have to look at which sales tax and who it’s on and who’s paying and all that.

In other words, you have to look at what economists look at – the incidence of the sales tax – and what changes.

Anything else I should ask you on this to help people understand the sales tax debate?

That’s about it. One thing I would add – there has been a lot of talk about competitiveness. In terms of sales taxes, Rhode Island already had rough parity and maybe even a slight advantage compared to Massachusetts and Connecticut because even though the current state sales tax rate is higher for Rhode Island than for Massachusetts and Connecticut, Massachusetts and Connecticut generally tend to have higher local sales taxes, and so overall the effective rates even out.

So if you can get a lowering of the nominal tax rate by broadening the base, then that might actually help Rhode Island’s competitiveness and might actually draw in some shoppers from Massachusetts and Connecticut. So it’s also another issue to consider.

On that point, though, I’ve heard a lot of skepticism here – understandably, people aren’t economists, and they wonder, would having Rhode Island at 6% versus Massachusetts at 6.25% really have that big an impact on consumer habits and where people go to spend their money?

If you look at just the state sales tax rates, no. What you have to remember is that most Massachusetts counties add a lot of additional sales tax rates, more than Rhode Island does. So once you add together the state and local tax rates, a reduction in the Rhode Island state rate to 6% would have a significant difference, assuming of course that local governments in Rhode Island didn’t raise their own rates.

Correction: Andres writes in to note that commenter Mario is correct in pointing out Massachusetts and Connecticut do not have local sales taxes.

(photo: Seeking Alpha)

WPRI.com intern Claire Peracchio contributed research.

The higher pension liability doesn’t necessarily threaten the state’s credit rating, said Marcia Van Wagner, a Moody’s Investors Service analyst in New York. She said Rhode Island has been making its annual pension contributions, unlike some states that have deferred payments amid fiscal stress.

“We try to look at this in a balanced way that takes into account the state’s willingness to address its obligations as well as balance its obligations against other requirements in its budget,” Van Wagner said.

(Thank you to the savvy reader who sent the article my way.)

Moody’s Investors Service has begun to recalculate the states’ debt burdens in a way that includes unfunded pensions, something states and others have ardently resisted until now. …

Moody’s new approach may now turn the tide in favor of more disclosure. The ratings agency said that in the future, it will add states’ unfunded pension obligations together with the value of their bonds, and consider the totals when rating their credit. The new approach will be more comparable to how the agency rates corporate debt and sovereign debt. …

Under its new method, Moody’s found that the states with the biggest total indebtedness included Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island.

Rhode Island’s combined debt and pension liability is equal to 13.9% of the state’s gross domestic product, or $6,261 per resident, according to a report Moody’s issued last week that prompted the article above. In both cases, that’s seventh-highest in the country.

On its face, this would seem to be a worrying development for Rhode Island, since a bigger debt burden could hurt its credit rating, forcing taxpayers to shoulder higher borrowing costs. But Robert Kurtter, a managing director in Moody’s Public Finance division, downplayed the impact of the new measure in an interview with The Wall Street Journal.

“We have always considered unfunded pension liabilities in our ratings for years. This is nothing new,” Kurtter told the paper. “This is meant to help investors understand a little better the impact of unfunded pension liabilities.” He also said it wouldn’t change any credit ratings; it’s apparently meant to be informational.

Moody’s is using the unfunded liability figures provided by the states; as I reported last fall, in Rhode Island that may understate the amount owed by more than $2 billion.

After it was released last Thursday, I asked General Treasurer Gina Raimondo’s spokeswoman, Joy Fox, what the treasurer made of the Moody’s report.

“Treasurer Raimondo believes that investors should have a full picture of the state’s financial situation before buying Rhode Island’s debt,” Fox replied in an e-mail. “She is currently evaluating the state’s disclosure policies with an eye toward increasing the information available.”

Coincidentally, Raimondo gave an interview to the Projo’s Kathy Gregg specifically about the pension system the day after the release of the eyebrow-raising Moody’s announcement, though it’s not mentioned in the article. The treasurer said she’s concerned about the pension fund’s cash flow and she doesn’t think the current estimates of the state’s liabilities are accurate.

We’ll have to wait and see what she plans to do. As Gregg notes, any upward revision in the official estimate of Rhode Island’s pension liability would increase the amount the state has to put into the system each year; the total contribution was about $200 million in 2008-09.

Update: That was fast.

Raimondo’s office just announced the start of “a comprehensive review of every aspect of the Treasury,” including the pension system. (Intriguingly, the press releases says Raimondo “will focus particularly on the management of the CollegeBoundfund,” which is managed by AllianceBernstein LP.)

Here’s the group of outside financial people Raimondo has tapped to help her conduct the review:

• Arthur X. Duffy, president of the Rex Capital Advisors LLC
• Timothy V. Geremia, CIO of Coastline Trust Company
• Martha Conn Hultzman, principal at Lefkowitz, Garfinkel, Champi & DePienzo P.C.
• Douglas L. Jacobs, retired EVP and treasurer of FleetBoston
• Peter D. Kiernan, III, CEO of Kiernan Ventures
• Edwin J. Santos, former group EVP and general auditor for Citizens Financial Group

Providence’s financial position has “narrowed” over the past two years because of $35 million in state aid cuts and declining property values, Moody’s Investors Service said in a report issued this week and obtained by WPRI.com.

And it warned that the incoming administration of Mayor-elect Angel Taveras “will be challenged to regain fiscal stability” anytime in the near future as further aid cuts loom and the economic recovery remains “slow.”

Before the recession, the Cicilline administration “had a long history of balanced operations,” with budget surpluses recorded each year from 2004 to 2008 that left the city with $22.4 million in reserves.

Since then those reserves have shrunk by about two-thirds to $8.1 million, after some of the money was used to cover deficits over the past two years.

Read the rest on WPRI.com.

Here are PDFs of the Moody’s report and the S&P report. Take a look – what strikes you as interesting?

Update: And if you’re wondering where things stand overall with the 38 Studios deal, check out this post from Friday.