Pittsburgh belted an unusual triple when Standard & Poor’s raised its long-term rating on the city’s general obligation bonds by three notches, to A from BBB, with a stable outlook.
According to city finance director Scott Kunka, it marks the city’s 10th upgrade in its nine-year march from speculative-grade status.
“Obviously, we’re very pleased to have gone from junk bonds nine years ago to 10 separate upgrades,” he said in an interview Friday.
Standard & Poor’s credit analyst Andrew Teras cited the city’s restored structural balance, growth in reserves, reduced debt profile and steps local officials have taken to minimize long-term liabilities such as pensions. The rating firm and city officials held a conference call on June 18.
All three major rating agencies have the city in the A range. Moody’s Investors Service and Fitch Ratings assign A1 and A ratings, respectively, with stable outlooks.
“Super upgrades such as this are rare,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.
“In 2006, we inherited a city under financial distress with a low bond rating,” Mayor Luke Ravenstahl said in a statement. “By focusing on economic development, debt reduction, pension reform, labor peace and prudent fiscal management, we have made great strides in improving Pittsburgh’s financial health.”
Moody’s and Standard & Poor’s adjusted their outlooks from negative to stable in January 2012 after Ravenstahl and several city leaders pitched the rating agencies in New York.
According to the mayor, the city saved $1 million in insurance costs and $5 million dollars that year, all of which it put into its five-year, $125 million, pay-as-you-go capital budget.
Standard & Poor’s also cited continued oversight by the Intergovernmental Cooperation Authority and the state Department of Community and Economic Development under the Act 47 program for distressed communities. Pittsburgh has requested DCED to exit Act 47, saying the “distressed” label is an unwarranted stigma, but its budget would remain under ICA overview.
The city pared its debt 30% from $824 million in 2006, when Ravenstahl took office, to $560 million after Pittsburgh made a $20 million interest payment in March.
Two weeks ago, Standard & Poor’s raised Philadelphia’s long-term and underlying GO rating to A-minus from BBB-plus. It’s Philadelphia’s first such rating since 1979.
“As was the case with Philadelphia, S&P lagged the other rating agencies in bringing Pittsburgh into the A category,” Schankel wrote in a report. “[This] is particularly interesting since overall, S&P upgrades have exceeded downgrades in all but three quarters since well before the recession, while both Moody’s and Fitch have had more downs than ups every quarter since [the fourth quarter of 2008].”
Combined, the three ratings “seem to be more in line with how the market in general is looking at Pittsburgh,” said Rachel Barkley, an analyst at Morningstar Inc. “It’s definitely good news. Looking at the city’s credit quality, you see that their economy is doing really well. It’s a diverse economy and unemployment is down.”
Standard & Poor’s, though, warned that Pittsburgh still faces pressures from high fixed costs, sizable long-term liabilities, and diminished budgetary flexibility due to allocation of a portion of reserves and operating resources to address its high debt burden and underfunded pension system.
Pittsburgh’s pension system is 62% funded, according to Kunka.
“Pittsburgh still has some risks,” Barkley added. “Their debt level is a high percentage of spending, but it’s not anything new. They’ve been working on it a while.”
David Fiorenza, a Villanova School of Business professor and the chief financial officer of Radnor Township, Pa., cited the diligence of Pittsburgh finance officials.
“Having a solid comprehensive annual financial report that the city has been preparing since 1979 gives the auditors, rating agencies and future bondholders a good perspective of where the city was and where it will be in the near future,” he said.
