Fitch Ratings Monday downgraded Philadelphia to BBB from BBB-plus and removed the credit from negative watch, affecting $1.1 billion of general obligation debt. The outlook is stable.
The rating change is due to weaker year-end results for fiscal 2009, which ended June 30, and also for the first quarter of fiscal 2010, even after officials implemented “significant and proactive” spending cuts, according to Fitch.
“Fitch believes the operating deficits in recent fiscal years will limit the city’s financial flexibility going forward and a return to more stable operations will be difficult to achieve given the current economic environment,” the rating report said.
In addition, the city’s wage tax receipts, its largest source of general fund revenue, dropped by roughly 4.6% in the first quarter of fiscal 2010, which began July 1.
“While financial projections for the balance of the fiscal year appear more conservative than in past years, Fitch remains concerned over the potential for further declines in tax revenues given current economic trends, particularly related to rising unemployment and its impact on wage tax collections,” the agency said.
City officials last month revised wage tax revenue for fiscal 2010 downwards by $50 million to better reflect an anticipated drop in wage-tax receipts, said Philadelphia finance director Rob Dubow.
“Obviously no one ever wants to be downgraded, but the thing that they seem most concerned about was the slowdown in our economy and what that means for our wage-tax revenues, and that’s a concern that we share,” Dubow said. “And we’ve actually adjusted our forecast for that. We took our wage-tax numbers down by $50 million to show the impact of a weakening economy, and that was on top of us already assuming that the economy would continue to contract this year.”
Mayor Michael Nutter and his administration are in the midst of labor contract agreements on each of the city’s four labor contracts. Any potential increase to labor costs was not included in Philadelphia’s current budget, according to Fitch.
The mayor also is seeking to alter retirement packages for new city employees so that those workers would participate in a 401K-type retirement benefit package rather than a traditional pension plan.
Earlier this year, the city addressed a $2 billion deficit in its five-year fiscal plan with spending reductions, increasing its sales tax by one percentage point to 8%, and postponing a portion of its pension payments this fiscal year and next.
“We know that there are some further actions we have to take and we’ve been working with our departments on those to make sure we stay in balance,” Dubow said. “But I think one of the things that we’ve shown over the last year and a half since the economy really went bad, is that we’re able to make those adjustments to keep ourselves in balance.”
On the positive side, Dubow and city Treasurer Rebecca Rhynhart said real-estate transfer tax and business privilege tax collections are coming in higher than expected.
Moody’s Investors Service assigns a Baa1 rating and negative outlook to Philadelphia. Standard & Poor’s rates the city’s credit BBB-plus with a stable outlook.
