A recently passed Philadelphia cigarette tax is a temporary plus for the financially-distressed Philadelphia School District, said Moody's Investors Service.

On Sept. 24 Pennsylvania Gov. Tom Corbett signed a $2 per pack cigarette tax to be charged in Philadelphia. With the new tax, each cigarette pack will have a total of $3.60 in city and state taxes.

The new $2 charge is expected to generate $63 million to 80 million each fiscal year for the district.

Moody's assigns the district's bonds an underlying Ba3 rating and an enhanced rating of A1, because of the district's participation in the Pennsylvania State Aid Intercept Program.

Because the cigarette tax will only be collected for nine months in the current fiscal year, the district will gain about $50 million instead of the $80 million it needs, said Moody's analyst Dan Seymour. Since it anticipated an $80 million shortfall without the tax, it will still have to look for an additional $30 million in revenues this fiscal year.

An $80 million supplement would equal 3.5% of the district's revenue.

The cigarette tax will not bring in enough revenue to allow the district to improve the quality of its offerings, which have already been hit by major cuts, Seymour said. Further, the new cigarette tax will elapse in five years, unless the state takes further action.

On the plus side, the tax will allow the district to avoid substantial further cuts that would undermine its educational mission, Seymour said. The state's passage of the tax, with the city government's encouragement, illustrates the state's and city's support for the district.

The district has about $3.1 billion in bond debt outstanding. Fitch Ratings has an underlying rating of BB-minus on the debt and an enhanced rating of A-plus.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.