It’s sunny in Philadelphia; city upgraded ahead of bond sale

As Philadelphia gears up to sell $124 million of social bonds, it heads into the market sporting a ratings upgrade, and a positive outlook revision.

Moody’s Investors Service upgraded Philadelphia’s issuer rating to A1 from A2 late last month and kept the credit outlook on the city at stable. Meanwhile, S&P Global Ratings revised its outlook on the city to positive from stable and affirmed the A rating.

About $3.75 billion of tax-supported debt was outstanding as of June 30, 2022.

“We are proud of the latest positive ratings,” said Mayor Jim Kenney. “Our administration has made the city’s financial health a priority and we’re pleased with the latest results of our ongoing efforts.”

Moody’s noted the city’s fund balance and liquidity “has materially strengthened over the past few years in particular, though this follows a decades-long trend of steadily improved financial management and governance controls. The issuer rating also considers the city’s manageable leverage and fixed costs compared to its revenues.”

The city’s GO debt and service fee revenue bonds, including its pension related debt, and lease revenue bonds are rated in line with the city’s A1 issuer rating, reflecting the city’s full faith credit and taxing power, Moody’s said.

“The stable outlook reflects our expectation that the city’s reserve and liquidity position will hold steady in the near term, in line with management’s current projections,” Moody’s said. “The outlook also incorporates an expectation of continued tax base recovery post-pandemic and resiliency through any potential recessionary economic cycle.”

S&P said its outlook revision was based on the city’s strong level of reserves.

“The outlook revision reflects our expectation that there is at least a one-in-three chance that we will raise the rating within the next two years if the city is able to maintain reserves at levels we consider strong to adequate, while making contributions to its budget stabilization reserve and returning to structural balance, in line with its current projections,” said S&P credit analyst Cora Bruemmer.

“The positive outlook further reflects our view there is at least a one-in-three chance that over the next two years the city will hold its combined budget stabilization reserve and available general fund reserves at levels we consider strong, while simultaneously containing expenditure growth, such that it can achieve structural balance without federal stimulus,” S&P said.

S&P also revised the outlook on the Philadelphia Authority for Industrial Development lease revenue bonds issued for the city and affirmed the rating at A. It affirmed the AA-plus/A-1-plus rating on certain PAID debt, with TD Bank providing liquidity support.

“The recent rating actions are a major accomplishment and a testament to the city’s commitment to our financial health,” said city treasurer Jackie Dunn. “Our ratings reflect the progress the city has made over time on important issues like rebuilding reserves and improving the health of our pension fund.”

Fitch Ratings affirmed the city’s issuer default rating and unlimited tax GO rating at A along with the Philadelphia Municipal Authority bonds, the Philadelphia Authority for Industrial Development bonds, Philadelphia Redevelopment Authority bonds and Philadelphia Parking Authority Series 1999A parking system revenue bonds.

Fitch has a stable outlook on the credits. Last July, Fitch upgraded the city’s rating to A from A-minus.

Philadelphia is located along the southeastern border of Pennsylvania and is the largest city in the state with about 1.612 million residents. It’s the sixth-largest city in the United States.

The city has a stable employment base weighted toward higher education, healthcare and professional and business services, according to the rating agencies.

However, “residential income levels are low when compared with the state and nation and the city poverty rate was high at 22.8% in 2021, compared with a national rate of 12.6%,” Fitch said.

“The IDR and bond ratings of A reflects the city’s improved operating performance, supported more recently by a robust tax revenue rebound and management’s proactive budgetary actions,” Fitch said. “The ratings also reflect the city’s fundamentally sound and diverse economic base including healthy growth in assessed values, broad legal control over key revenue items and a moderate long-term liability burden.”

Fitch noted, “these strengths are offset by a weak demographic profile, the city’s workforce-related expenditure constraints, and historically constrained, but improved gap-closing capacity, even throughout the pandemic.”

Philadelphia ended fiscal 2022 with a $779 million fund balance, its highest ever and the fiscal 2023 balance is estimated at $619 million. The city has pledged to make a $65 million deposit to the rainy-day fund in fiscal 2023 to build reserves.

The city said it has made significant progress improving the health of its pension fund.

According to officials, the pension funding ratio has improved to 57.6% from 44% on an actuarial basis and noted it continues to contribute more than the state law’s annual required contribution.

Moody’s considers the city’s ability and willingness to improve the health of its pension fund as a credit strength.

Fitch also noted the city consistently directs otherwise unallocated revenues to the pension fund in addition to making its standard annual contributions.

“Since fiscal 2018, calculation of the city’s annual pension contributions utilizes a revenue recognition policy (RRP) that leads to contributions above the statutorily required minimum municipal obligation (MMO), which is essentially the actuarially determined contribution (ADC),” Fitch said.

“The RRP excludes the excess sales tax contributions and certain recently collectively bargained increases in employee contributions, when calculating the city’s annual pension contributions,” Fitch said. “Therefore, instead of reducing annual contributions, those additional revenues are used exclusively to pay down the pension liability. The fiscal 2023 RRP estimated contribution reflects an almost 5% increase and 6.2% increase in the sales tax contribution compared with fiscal 2022 amounts.”

Loop Capital Markets is set to price the Philadelphia Redevelopment Authority’s $124.07 million of city service agreement revenue bonds on Wednesday.

The deal consists of $79.335 million of Series 2023A taxable social bonds and $20.07 million of Series 2023B tax-exempt social bonds. Loop will also price the PRA’s $24.66 million of Series 2023C tax-exempt revenue refunding bonds on Wednesday.

The issue is rated A1 by Moody’s and A by S&P and Fitch.

Proceeds of the sale will go to the city’s Neighborhood Preservation Initiative. The money will fund affordable housing initiatives, create commercial corridors and aid small business revitalization.

The NPI is a $400 million investment program funded by the city to support successful affordable housing and commercial revitalization programs.

“We strive to promote equity, operate openly, and engage residents in our work,” NPI says on its website. It also “offers opportunity for residents to work with us. Community goals inform our strategies.”

It says its goals are to create “well-planned communities. Housing for all income levels. Access to public art. Our unique history honored. Successful businesses and jobs for residents. In short, a city with vibrant, healthy neighborhoods.”