Philadelphia School District debt was downgraded five notches Tuesday night as a result of Moody's Investors Service adopting a new rating approach to Pennsylvania State Aid Intercept Program.
Moody's now has a program-enhanced rating of the district's debt of Ba2, down from A3. As recently as early September Moody's gave the district's program enhanced debt a rating of A1. As of February the district had $3.2 billion outstanding bonds affected by the ratings.
In the new rating methodology, Moody's increases the rating by one notch from the issuer's underlying rating. It maintains a Baa1 cap and a B1 floor on all enhanced school district ratings.
In the case of the Philadelphia School District the new methodology means that Moody's is giving a program enhanced rating to this district of Ba2, one notch above its underlying rating of Ba3.
"It is a major downgrade for a big school district," said Alan Schankel, managing director of Janney Montgomery Scott. "Investors have understood its underlying rating was Ba3…. So this doesn't come as a total shock. But it doesn't help the school district; they're going to have to pay more when they next borrow."
The city's school district has been afflicted by a reduction of funding as the city's school children have increasingly chosen to attend charter schools. The district also does not have taxing authority but depends on the state and city for funding. The city has above-average poverty and unemployment rates.
"If you're an issuer whose fortunes are tied to the state, especially when the state is having a hard time passing a budget six months after the fiscal year started, it makes a program vulnerable," said Howard Cure, director of municipal research at Evercore.
Philadelphia is the United States' fifth most populous city. Fitch Ratings rates the Philadelphia School District debt with an enhanced rating of A-plus and an underlying rating of BB-minus.
The new Moody's methodology also affected the Penn Hills School District, Pa., according to spokesman for the rating agency. The pre-default rating went down to B1 from Baa1. The post-default rating was raised to B1 from B2.