Moody's Investors Service has downgraded to A2 from A1 the rating on City of Philadelphia's $3.8 billion in general obligation bonds and unconditional General Fund debt obligations.
Moody's has also assigned an A2 rating to the city's $199 million General Obligation Bonds, Series 2010A and $69 million General Obligation Bonds, Series 2010B (Federally Taxable - Issuer Subsidy - Build America Bonds). Approximately $135.3 million of the Series A bonds will be used to refund portions of the city's Series 1998 and 2001 bonds for a net present value savings of 6.5% of refunded principal. The remaining $63.65 million and the Series B bonds will be used to finance the city's ongoing capital improvement plan.
RATINGS RATIONALE
The downgrade to A2 reflects continued weakness of the city's finances, which had improved from 2005 to 2007, but deteriorated in fiscal 2008 and 2009, and improved in 2010, but continue to face challenges in the coming few years. Although fiscal 2010 results are favorable, General Fund balance remains negative, both on a budgetary and GAAP basis, and we believe the city has little budgetary margin over its five-year plan which includes significant repayment of deferred pension contributions in 2013 and 2014. In response to the significant financial stresses that began in fiscal 2008, city officials created a fiscal recovery plan that included a temporary sales tax increase and the pension deferral in fiscal 2010 and 2011; the plan gained the required approval from the Commonwealth of Pennsylvania legislature at the end of September 2009, allowing for the sales tax increase to begin at the beginning of October. Additional revenue and expenditure reductions in fiscal 2010 resulted in surplus operations, although these were diminished from previous forecasts due to a late state aid payment of approximately $70 million; much of that revenue has since been received.
The fiscal 2011 budget, which includes a property tax increase and the full-year effect of the sales tax increase, projects an additional surplus in fiscal 2011 with the expectation that the city will return to a positive, albeit low, General Fund balance position. Throughout the plan, financial flexibility remains relatively weak, providing little cushion for contingencies. Moody's believes that growth in the local economy will remain weak, affecting wage tax collections and the potential for mid-year cuts in aid from the Commonwealth of Pennsylvania (G.O. rated Aa1 with a negative outlook).
The A2 rating also reflects the city's ongoing economic challenges, weak demographics and high unemployment, modest property value growth, and a heavy burden of tax-supported debt. Moody's believes the city's weak credit characteristics are mitigated by the fact that it is subject to a state oversight board, with well-established five-year planning and quarterly monitoring procedures in place.
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