Philadelphia's credit outlook slipped as S&P Global Ratings revised it to negative from stable ahead of the city's planned $282.9 million general obligation refunding sale.
S&P affirmed Philadelphia's A-plus bond rating late Tuesday, but noted concerns about the city's rising retirement costs and reserve levels for its negative outlook. S&P analyst Linda Yip emphasized that the nation's fifth most populous city is at risk of seeing its reserves fall to less than 1% of expenditures over the next one to two years because of pressures on pensions and other post-employment benefit expenses.
"If reserves continue to decline and management doesn't have an adequate plan to address its structural imbalance and its pension and OPEB situation, we
could lower the rating within the next one year to two years," said Yip in a statement. "Conversely, if management were to address the budgetary imbalances and retirement cost pressure adequately while it demonstrates improved fund balances, holding all other factors equal, we could revise the outlook to stable."
Philadelphia plans to price the GO refunding bonds on Nov. 16.
Moody's Investors Service rated the refunding bonds A2 and kept the negative outlook it first announced in September. Philadelphia is planning to use proceeds from the series 2016 GO bonds to refund the city's series 2006, 2007A, 2008A, 2009A and 2011 GO bonds.
Philadelphia has $1.5 billion in outstanding GO debt, according to Moody's. The city received four bond upgrades under previous Mayor Michael Nutter including a December 2013 boost from S&P to A-plus. Fitch Ratings rates Philadelphia A-minus.
City spokesman Mike Dunn said in response to the S&P action that since new Mayor Jim Kenney took office in January there has been a sharp focus on improving the health of the city's pension fund and reserves. The city crafted a five-year plan in March that addressed boosting reserves.
"The S&P report focuses on concerns that we have been talking about since the beginning of this Administration and we are committed to continuing the work we have been doing to improve the health of our Pension Fund and to improve our fund balances in the long term," said Dunn. "The report will not impact our plans for the refunding sale."
The Philadelphia Municipal Authority is also prepping an $83 million transaction of city agreement revenue refunding bonds on Dec. 7. S&P also assigned these bonds an A-plus rating with a negative outlook. Moody's rated the securities Aa2.
The series 2016 revenue refunding bonds are aimed at refunding series 2009 lease revenue bonds. Yip noted that city officials project net present value savings from the refundings totaling $59 million throughout the life of the bonds with no restructuring of any maturity.