Fitch Places State of Rhode Island GOs on Rating Watch Negative

Rhode Island & Providence Plantations, State of RI:

--State GO bonds 'AA';

--State lease participation certificates 'AA-'.

Rhode Island Refunding Bond Authority:

--State public projects revenue bonds 'AA-'.

Rhode Island Convention Center Authority:

--Convention center and civic center revenue bonds 'AA-'.

The rating action reflects weak tax revenue collections this year and the announcement of lowered revenue forecasts for the current and upcoming fiscal years. This exacerbates an already strained financial position. The state now projects a significant deficit for fiscal 2008, which already employs a substantial amount of tobacco securitization bond proceeds for operations. Fitch will resolve the Rating Watch Negative based on the direction of the state's economy and revenues in the coming months and state actions to address the projected deficits in the current and next fiscal years.

Rhode Island's financial stress reflects underlying weakness in key revenue sources and numerous tax credit and tax cut programs undertaken in recent years. This month's revenue estimating conference reduced estimates for personal income, sales and use, general business, and realty transfer taxes, reflecting weakness in overall consumer confidence and the housing market in the state. The state's two largest revenue sources, personal income taxes and sales taxes, are now forecast to drop 1.6% and 1.0%, respectively, in fiscal 2008 before recovering in fiscal 2009. In total, general revenue estimates were brought down by $113 million for fiscal 2008 (compared to the enacted budget) and $135 million for fiscal 2009 (compared to the budget office's working estimate). Including expenditure estimate increases, the budget office currently projects deficits of $152 million for the current fiscal year (about 4.5% of revenues) and at least $380 million for fiscal 2009 (about 12% of revenues), assuming that the reserve remains fully funded at about $101 million.

Despite revenue raising measures and limited spending growth in the fiscal 2008 budget, earlier this year the state issued residual tobacco settlement bonds and used the majority of the $195 million in proceeds for budget balancing purposes ($43 million in fiscal 2007 and $124 million in fiscal 2008). The governor has announced substantial state workforce reductions designed to generate savings of about $100 million in fiscal 2009; these savings are not factored into the current deficit estimates. The full-time-equivalent headcount reduction of about 1,000 will be accomplished through elimination of vacant positions and non-replacement of retirees, cuts to contract employees, and state employee layoffs.

Rhode Island has added jobs in every year since 1992 and outperformed both the U.S. and neighboring states in the most recent recession. The pace of growth has lagged the U.S. in recent years, with nonfarm employment up 0.5% in 2006, compared to 1.8% for the U.S., and 0.7% in September 2007, compared to the nation's 1.2%. The rate of personal income growth also has been below that of the nation in recent years. Revised 2006 personal income per capita equals 102% of the U.S., ranking 19th of the states. Rhode Island is experiencing one of the highest rates of growth of the states in overall mortgage delinquencies, fueled by subprime delinquencies.

Rhode Island's GO bond rating of 'AA' is based on a history of actions along with institutional controls to protect its debt and financial position. Financial controls, particularly a 98% constitutional appropriation limit and a fully funded 3% reserve (both provisions will be strengthened in the coming years), have supported maintenance of the 'AA' rating during the recent financial strain. The state's economy has grown and diversified away from manufacturing, making it less vulnerable to economic cyclicality. Debt levels are above average but still in the moderate range. Pension funding levels are low.

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