Pennsylvania's fiscal 2010 budget impasse could force Philadelphia to make additional cuts in its own budget plan.

This comes as Fitch Ratings late Tuesday placed Philadelphia's BBB-plus general obligation credit on negative watch.

State lawmakers may not pass a law that would help balance the city's fiscal 2010 budget by Tuesday, the day that the Pennsylvania Intergovernmental Cooperation Authority is set to weigh in on the city's budget, according to Rob Dubow, Philadelphia's finance director. Fiscal 2010 began July 1.

The city is looking to balance its budget with a temporary sales tax increase of one cent and by deferring a portion of its pension payments for two years. Both initiatives require legislative approval, but the legislature has yet to pass a state fiscal 2010 budget, with Republican lawmakers asking for additional cuts and Gov. Edward Rendell seeking a 16% boost in the state's personal income tax to help generate additional revenue.

Lawmakers yesterday amended a bill that would allow Philadelphia to postpone a portion of its retirement contributions this year and next by including the sale-tax hike to the legislation. The bill is now in committee yet may not reach Rendell's desk for his signature by Tuesday.

"Since it's in committee, I think it would take a little longer than that," Dubow said.

Without legislative action, Philadelphia will have to cut further into its fiscal 2010 budget by roughly $256 million. In addition, pending cuts to the state budget would also force the city to reduce expenditures even more.

"So that's why we're developing contingency plans so in the case that that doesn't happen, we have backup," Dubow said. "It's a very painful backup, it's something we really don't want to have to do at all, but that's why were developing it."

Uri Monson, PICA's executive director, said the authority's board members are in a wait-and-see mode until Tuesday as state legislative action changes day to day.

"We're looking at all possible avenues for how we can properly evaluate the plan, given what we know at the time and how we evaluate it," Monson said. "I don't know at this point where it's going to end up because it really is a moving target."

Fitch cited the state-level budget stalemate as its reasoning for placing the city on negative watch, although analyst Christopher Hessenthaler said the agency would review Philadelphia again once its fiscal 2010 budget is passed.

"Fitch believes the state budget impasse is likely to continue beyond what was originally anticipated, leaving the city's much-needed budgetary solutions in question," according to a Fitch report. "The negative watch will be resolved following the enactment of the state's budget, the decision regarding the proposed temporary sales tax increase and partial deferral of pension payments, and Fitch's evaluation of the city's subsequent response."

Philadelphia has $1.32 billion of general obligation debt. Fitch and Standard & Poor's rate the GO credit BBB-plus, while Standard & Poor's gives the city a stable outlook. Moody's Investors Service rates Philadelphia Baa1 with a negative outlook.

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