Philadelphia Finances Smoother as Mayor Leaves Office

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When Michael Nutter took over as Philadelphia mayor in January 2008, all three major ratings agencies rated the city in the triple-B category.

Eight years later as Nutter's two-term mayoral run nears an end, the nation's fifth largest city is in far better fiscal shape with single-A-level ratings after intensive cost-cutting measures.

The city's rating improvements were won despite challenges, particularly after the Democratic mayor was confronted by a steep recession soon after entering City Hall.

"They experienced some head winds in the economic downturn," said Standard & Poor's analyst Karl Jacob. "He got tested right away."

Philadelphia has experienced four credit upgrades under Nutter and is at A levels for first time since the 1970s. Standard & Poor's noted improved reserves and strong liquidity in its one-notch upgrade of Philadelphia's general obligation debt to A-plus in December 2013.

Moody's Investors Service rates the city A2, and Fitch Ratings assigns its A-minus rating.

"We're one of the few big cities to come out of the recession and receive an upgrade in its bond rating," said Nutter, who will be replaced in January by incoming Mayor Jim Kenney. Term limits prevented him from running again.

"We have managed cash well and lived within our means," Nutter said.

Nutter's first appointment as mayor was Rob Dubow as director of finance, and Nutter gives Dubow much of the credit for the city's fiscal improvements. Dubow came to City Hall well versed in the city's finances, after previously working as executive director of the Pennsylvania Intergovernmental Authority, an oversight board for Philadelphia established by the Commonwealth in 1991.

Kenney is keeping Dubow on board in the position of chief financial officer.

"I purposely by naming him first was sending an important message that fiscal stability would be the hallmark of my administration," Nutter said of Dubow, who was also Philadelphia budget director from 2000 to 2004.

"Mayor Nutter has had a more than competent Director of Finance in Rob Dubow," said Villanova University School of Business professor David Fiorenza. "He is well respected in the public sector."

Fiorenza also praised Nutter's commitment to adequately funding Philadelphia's Capital Improvement Plan that was designated for city libraries and the Mann Music Center.

He added that multi-year budget reporting was also essential toward elevating the city's credit quality.

"For Philadelphia to have investors purchase their bonds so there could be improvements to infrastructure, budget reporting on a multi-year basis is important," said Fiorenza, a former chief financial officer for Radnor Township, Pa. in suburban Philadelphia. "This started the process with the revitalization of Philadelphia with the new Convention Center and infrastructure improvements."

While facing an economic downturn at the start of his first term, Nutter focused efforts on reducing costs and increasing revenues; Nutter himself took a 10% salary cut. He also worked with city departments to identify cost-reduction opportunities.

"This was about shared sacrifice," said Nutter, who was president of the U.S. Conference of Mayors from June 2012 to June 2013. "Everyone had to give up a little bit of something."

Dubow pointed to the emphasis he placed on collecting delinquent taxes in the early part of the recession as being key to weathering the early storm. The administration later formed a new Delinquent Tax Collection Strategy that implemented advanced technology and data analysis tools. General Fund tax collections in October 2015 were up $9 million, or 5.2%, from the year-earlier period, according to the city's preliminary revenue report.

"We did everything we could to collect the revenue owed to us," said Dubow. "That was very important."

Kenney said during his campaign for mayor that he wants to expand on the Revenue Department's 25% reduction in delinquent properties by contacting those not complying earlier in the process and reducing penalties. The mayor-elect also plans to focus heavily on real estate investors who have gone years without developing properties they purchased through either a securitized individual or bulk lien sale.

Nutter would have liked to accomplish more for the city's underfunded pensions. Philadelphia's pension funding ratio is at only a 47% level, according to city officials.

Nutter had a plan: he put together a sale of the city-owned Philadelphia Gas Works natural gas utility that would have enabled a deposit between $420 million and $630 million into the pension fund.

The sale was rejected by the City Council in October 2014.

Had the transaction been allowed to move forward, Nutter said, the pension fund could have been at an 80% level by 2027.

"That was clearly an opportunity missed to invest hundreds and millions of dollars in our pension fund," said Nutter.

"It remains a serious problem," he said.

"That would have made a meaningful impact in their funded status," said S&P analyst Hilary Sutton of the Gas Works proposal. "Even though the PGW sale didn't work out we still think they are able to manage their liabilities through benefit reforms."

Kenney, a former Democratic city councilman, said as mayor he plans to confront the unfunded pension liability struggle in part by overfunding the minimum municipal obligation when revenue is above projections. Kenney is also looking to convene an independent Public Pension Funding Commission to evaluate the performance of fund managers to see if contracts need to be changed.

Nutter's eight-year run leading Philadelphia will officially come to a close when Kenney is sworn in as mayor on Jan. 4. While the City of Brotherly Love still isn't out of the woods with its credit obstacles, Kenney credits his predecessor's leadership in steering the ship in the right direction.

"Mayor Nutter navigated our City through the greatest economic recession since the Great Depression very well," said Kenney. "There are still financial challenges that our administration will inherit, but the situation would be much worse if not for the skill of his team."

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