Moody's Investors Service revised its outlook on Allentown, Pa., to stable from negative and affirmed its A3 rating, citing a water and sewer system lease deal that plugged a pension gap and captured the attention of the capital markets.

The move affects $104 million of outstanding general obligation debt. An unlimited tax pledge secures that debt.

"The revision of the outlook to stable from negative reflects our belief that the city is better positioned to achieve structural balance and improve its financial operations given the improved liquidity and reduction of near-term fixed costs after leasing its water and sewer system," Moody's said in its report Monday night.

Allentown, the 119,000 seat of Lehigh County, sold its system in May to the Lehigh County Authority public works agency after a request-for-proposals process. The authority in July issued $307 million in bonds to finance the transaction.

PFM Group Inc. of Philadelphia was the city's financial advisor on the deal.

"I am very pleased with the most recent outlook news from Moody's. I am confident that over the next several months this will not be the last positive development from the credit rating agencies for the city of Allentown," Mayor Ed Pawlowski said.

Allentown said its concession marked the first lease of public access in the United States to have been offered to both corporate and governmental bidding teams and to have secured competitive final bids from both.

The city used $160 million from the lease deal to fund its three pension plans, which according to Janney Capital Markets enabled the city to pare its adjusted net pension obligation from 275% of annual revenues to 90%.

Pawlowski, a Democratic candidate for governor, told the City Council in April that without the water lease, "we'll be just another Pennsylvania city making ugly headlines."

The city also replenished its unrestricted cash through the deal, under which it received $211 million upfront and an annual payment of $500,000 beginning in 2016.

The A3 rating, according to Moody's reflects the city's rapidly growing, moderately-sized tax base, with weak income levels and a high poverty rate. Moody's also cited a multi-year trend of deep structural budget imbalance a "moderately high but manageable" debt burden.

Standard & Poor's rates the city's GO bonds BBB-plus and stable. S&P rated the Lehigh County Authority's bonds A.


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