Moody's Investors Service has downgraded the rating on Philadelphia Authority for Industrial Development (PAID), PA's $958.4 million Pension Funding Bonds (City of Philadelphia Retirement System), Series 1999A-1999C and $299.8 million City Service Agreement Refunding Revenue Bonds, Series 2012 (Federally Taxable) to A3 from A2. Concurrently, Moody's has confirmed the A2 rating on the city's remaining $875 million in outstanding service fee and lease debt that was issued by either the Philadelphia Authority for Industrial Development, Philadelphia Municipal Authority, or Philadelphia Redevelopment Authority. The outlook is negative reflecting the negative outlook on the city.
The confirmation of the A2 rating reflects the strong legal structure clearly laid out within the city's home rule charter, bond ordinances, and service fee/lease agreements. As stated in the documents, these service and lease rental payments are legal, valid and binding obligations of the city payable out of current city revenues. While the city does not pledge its full faith and credit and unlimited taxing power, the city covenants to provide for payment in its annual budget (same line item as General Obligation debt) and these payments are absolute and unconditional without being subject to any contingencies. For these reasons, we do not differentiate regarding essentiality and render them in the same band of credit quality as an ad valorem pledge.
The downgrade to A3 (one notch lower than city's General Obligation unlimited tax rating) on the city's PAID's Series 1999A-1999C and Series 2012 bonds (the "POB debt") reflects the additional risk of a higher loss given default for these securities relative to the city's other service-fee and lease-rental debt. The POB debt originally funded a portion of the unfunded liability for the city's retirement system and are not secured by the city's unlimited taxing power. In the event of a default, creditor recourse would likely be extremely limited, because of the narrow security pledge consisting only of the city's contractual obligation to make service fee payments.
The relative performance of pension obligation bonds (POBs) to other debt in Chapter 9 bankruptcies has been poor. While Philadelphia does not have the ability to declare bankruptcy until fiscal 2023 when its Pennsylvania Intergovernmental Cooperation Authority (PICA) bonds mature (requires written governor approval thereafter), the one-notch difference between the POB debt and the city's other debt reflects this distinction.
This action concludes a review undertaken in conjunction with the publication on July 26, 2016 of the Lease, Appropriation, Moral Obligation, and Comparable Debt of US State and Local Governments methodology.
