Scranton, Pa., received a general obligation upgrade from S&P Global Ratings to BB-plus from BB. The new rating is one level below investment grade.
S&P, which assigned a stable outlook, cited the city’s improved budget flexibility and liquidity, stemming largely from a sewer-system sale that enabled it to retire more than $40 million of high-coupon debt.
The city also suspended its cost-of-living-adjustments and intends to apply a portion of sewer system sale proceeds to pension funding.
“While these actions are expected to significantly lower the city's annual retirement and debt costs over the near term, S&P Global Ratings believes the city still lacks a realistic long-term plan to address its severely underfunded pensions,” S&P said in a statement on Thursday.
“Without a credible plan, [S&P] is not certain the city will be able to address any significant contribution increases adequately over the long term.”
Scranton, the 77,300-population seat of Lackawanna County in northeast Pennsylvania, has struggled financially with high pension debt and limited access to the capital markets since 2012, when its City Council defaulted on a $1 million parking authority bond payment.
City officials intend to use Series 2017 bond proceeds to current refund the city's series 2003B GO bonds for a net present value savings of about $1.4 million, shortening the overall maturity by two years. The Series 2017 bonds mature in 2029.
“We could raise the rating if liquidity were to improve and if management were to address fixed costs,” said S&P analyst Linda Yip. “In addition, while budgetary performance should improve in fiscal years 2017 and 2018, the city will need to sustain these results to demonstrate structural balance and continue to strengthen budgetary flexibility.
"If the city cannot adequately address fixed costs, creating further budgetary pressure that results in weaker budgetary performance, flexibility, or liquidity, we could lower the rating."