Many Rhode Island cities can't escape money woes

Mon Dec 19, 2011 2:34pm EST

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(Reuters) - The coming year will not bring much relief from the financial woes dogging cities and counties in Rhode Island, primarily because of a snarl of public pension problems, Moody' s Investors Service said on Monday.

"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," the credit rating agency said in a special report. "We expect few if any rating upgrades and a continuing trend of downgrade activity in the coming year."

Moody' s added that a state program to increase oversight of distressed local governments and help them reach better financial health "is relatively new and untested, and could be overwhelmed by multiple unanticipated local governments seeking state assistance simultaneously."

Relationships between local and state governments have become fraught over the last year. In order to keep their budgets balanced, states cut back aid to local governments, which are still smarting from the housing market downturn and increased demand for services.

Now, struggling municipalities such as Detroit are under the threat of state takeovers.

Moody' s said Rhode Island's "cuts in local aid are contributing to sustained revenue weakness," but it also warned a tangle of pension problems in the smallest state also poses risks to the 32 local governments there that it rates.

Central Falls, which recently sought bankruptcy protection because of its unmanageable pensions bills is under state oversight. East Providence, unable to close a large budget gap, is under state oversight, as well.

Moody's has recently downgraded those two cities, along with Woonsocket and Providence.

In November, the state enacted legislation to try to better fund its public pensions. Rhode Island has less than half the money it needs to pay future pension benefits. The law also required actuarial studies of municipal plans to be finished by April in order to find a way to solve the underfunding crisis at the local level.

"Salary and benefit packages negotiated by strong public employee bargaining exceed those of many other states," Moody' s said. "In addition, local governments are utilizing discount rates well above actual investment performance in recent years, and dated life expectancy projections continue to underestimate required pension assets."

The discount rate corresponds with the rate of return that pension funds expect on their investments, which typically provide the bulk of their revenues.

Moody' s said many local governments have also made small contributions to their pensions "with the intention of replenishing those payments when the economy recovered, a practice that has resulted in a high proportion of severely underfunded pension plans during recent years."

When the recession struck in 2007, Rhode Island was hit hard, primarily because its economy had faltered for decades.

"Even prior to the downturn, Rhode Island's manufacturing base had declined for several decades through the 1990s, resulting in a loss of employment in this sector, which currently accounts for only 8.8 percent of total statewide employment compared to 35 percent in 1970," Moody' s said.

Now, the state's economy is primarily driven by education and healthcare, but 17 percent of its jobs are provided by the federal government, mostly the military.

Moody' s noted that in a November report it put the likelihood of Rhode Island falling into a recession in the next six months at 59 percent. Only one other state, Wyoming, had a higher likelihood.

(Reporting By Lisa Lambert; Editing by Andrew Hay)

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