Officials in Philadelphia will continue to face daunting economic and budget problems despite the recent success of Mayor Edward Rendell in improving the city's finances, investors say.
On Monday, Moody's Investors Service upgraded bonds issued by the Pennsylvania Intergovernmental Cooperation Authority, the state agency that sells bonds on behalf of the city, to Baa1 from Baa. Standard & Poor's Corp. rates PICA debt A-minus, and Fitch Investors Service rates it BBB-plus.
The rating agency reassessed the authority bonds in connection with next week's $100 million bond issue. The deal will mark the agency's last transaction, a factor cited by Moody's in its reassessment.
Moody's also based its upgrade on Philadelphia's improving financial condition. The city pays off the bonds with a special tax on wages, salaries, and net profits earned by Philadelphia residents, and now that Philadelphia's years of fiscal instability appear over, Moody's has greater confidence in the ability of the Rendell Administration to control spending.
But structural economic and budget problems continue to plague Philadelphia, several money managers told The Bond Buyer, requiring further efforts by the city to reduce spending and bolster its revenue base.
At the moment, the city has below investment-grade ratings. The severity of the long-term problems coupled with the recent memory of the city's 1990 budget crisis will keep Philadelphia on the municipal market's list of highly scrutinized credits, investors said.
"In my view, the city has been investment grade since 1993," said Paul Flynn, an assistant vice president at the Vanguard Group, a major purchaser of Philadelphia debt. But "there needs to be a stabilization of job losses, changes in the tax structure, and a decrease in the wage tax to make Philly more attractive," he said.
Like all major cities, Philadelphia needs to combat outmigration of business, a shrinking tax base, and a high tax burden on individuals and businesses, investors say.
In addition, the city's public school system is plagued with faulty infrastructure and poor student achievement, which act as a drag on economic growth.
Although generally optimistic about the city's credit, Flynn said the city must "combat the flight of businesses to the suburbs" if it is to achieve long-term economic and budget progress.
Others agree. Long-term structural problems will require the attention of "a succession of [mayoral] administrations," said Jonathan Conley, vice president of the municipal bond department at Federated Research Group.
PICA, formed three years ago to guide the city out of its budget crisis, has done well in providing the scrutiny that the city's fiscal affairs lacked, Conley said.
"But addressing cyclical problems, which is how I see the point of PICA, is only as good as the city's ability to address long-term structural issues," Conley said.
Credit raters offer a similar diagnosis. The city is rated BB by Standard & Poor's Corp. and Ba by Moody's Investors Service.
For the city to pull itself into investment-grade territory, it must show that Rendell's fiscal reforms will not disappear with a change in mayors, raters said.
"We need to get a sense that the reforms are institutionalized," said Paul Devine, vice president and assistant director at Moody's. Moody's is planning to meet formally with city officials in December to review the city's credit.
