Philadelphia plans to sell $275 million of debt in early December, including $69 million of taxable Build America Bonds, following a Moody’s Investors Service downgrade to A2 from A1.
Moody’s Wednesday downgraded the city due to weakened finances and ongoing budgetary challenges. The outlook is stable.
Philadelphia’s $3.78 billion fiscal 2011 is projected to end with a positive general fund balance of $29.6 million — the first time since fiscal 2008 — and officials anticipate modest surpluses during the next five years.
Moody’s believes that while the excess funds are a positive step, the projected surpluses are still small and will continue to restrict Philadelphia’s financial flexibility to address unanticipated developments.
“General fund balance is projected to remain positive through the five-year plan, although fund balance levels will remain narrow, never going above $70 million, which will leave little margin for the city to deal with contingencies,” a Moody’s report reads.
Philadelphia finance director Rob Dubow and budget director Rebecca Rhynhart said the timing of Moody’s downgrade “was a little odd,” since the city is now looking at surpluses rather than the negative fund balances it has had to work with in recent years.
In addition, its limited fiscal flexibility is not new.
“Like every other city, we still have a number of fiscal challenges and we have to remain ever vigilant on our finances,” Dubow said. “So there are issues like there are issues everywhere … but we do think that, relative to where we were when they put us on negative outlook, we’ve stabilized.”
JPMorgan is book-runner for the upcoming $275 million deal. The sale will include about $206 million of Series 2010A tax-exempt bonds along with the Series 2010B BABs.
Officials anticipate refinancing $135.3 million of Series 1998 and 2001 bonds to generate a net present-value savings of around 3%.
Rhynhart said the city will monitor that anticipated refunding, as the goal is to capture savings above 3%.
Moody’s rates the Series 2010A and B bonds A2. Standard & Poor’s and Fitch Ratings rate the city BBB and A-minus, both with a stable outlook.
Philadelphia has $1.2 billion of outstanding general obligation debt. Its combined GO and tax-supported debt is $3.8 billion, according to Rhynhart.
To help balance recent budgets, the city has cut its payroll by more than 800, reduced expenditures, increased its sales tax temporarily by one percentage point to 8% for five years, and raised property taxes.
Officials also re-amortized its unfunded pension liability to 30 years from 20 and deferred a portion of retirement contributions, $150 million and $80 million, in fiscal 2010 and fiscal 2011.
Philadelphia is set to repay those delayed pension payments in fiscal 2013 and fiscal 2014.
The city operates under a state oversight board, the Pennsylvania Intergovernmental Cooperation Authority, which reviews its annual budgets and five-year spending plan.
