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Rating Action:

Moody's assigns A2 rating to City of Philadelphia, PA's $37.8 million City Agreement Bonds, Series 2018A and 2018B; Outlook remains negative

23 Mar 2018

New York, March 23, 2018 -- Moody's Investors Service has assigned an A2 rating to the City of Philadelphia, PA's $10.3 million City Agreement Revenue Bonds (Philadelphia Museum of Art Energy Savings Program), Series 2018A and $27.5 million City Agreement Revenue Refunding bonds (City of Philadelphia - One Benjamin Franklin Parkway Project), Series 2018B. Concurrently, we maintain an A2 rating on the city's General Obligation debt as well as an A2 rating on its outstanding service fee bonds (non pension related). Further, we maintain an A3 rating on the city's pension obligation bonds. Approximately $3.8 billion of tax-supported debt is currently outstanding. The outlook remains negative.

RATINGS RATIONALE

The A2 rating reflects the city's large and diverse tax base and its position as a regional hub for the mid-Atlantic US. The rating incorporates other tax base strengths not captured in traditional metrics, such as a significant "eds & meds" presence that serves as a considerable tax base anchor, offset by some persistent weaknesses, like the city's very high poverty and above average unemployment rate. The rating also reflects the city's continued financial challenges; particularly its narrow fund balance reserve, high leverage, and material long-term pension burden.

RATING OUTLOOK

The negative outlook reflects the city's current weak financial reserve levels as well as its forward looking projections for continued financial strain.

While projections have historically been conservative, and reserves have strengthened in 2017 as expected, the city's financial support for its school district remains an outstanding concern. The mayor has pledged to fund the district with new, permanent, tax revenues, which should not impact the city's current financial position. However, this budget has yet to be adopted. Until the city's future funding plans are decided, the effect on the city's already thin reserves, if any, is unclear.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Expansion in the tax base and strengthening of the socioeconomic profile

- Ability to achieve and maintain structural balance

- Growth of reserves to levels consistent with higher rating categories

- Substantial decrease of unfunded pension liabilities

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Significant tax base declines

- Inability to achieve and maintain structural balance

- Decrease in reserves beyond current expectations through fiscal 2019

- Increased support to school district that reduces the city's financial flexibility

- Failure to fund pension plan on sound basis going forward

- Change in service/fee legal structure

LEGAL SECURITY

The Series 2018A Bonds are payable by the Philadelphia Authority for Industrial Development (PAID) solely from certain service fee payments, paid by the city under the Service Agreement dated April 1, 2018. The 2018B bonds are secured by Rental Payments under the 1996 Lease Agreement between PAID and the city. The Service Fees and Rental Payments are payable solely from the current revenues of the City and are subject to annual appropriation.

As stated in the city's home rule charter, bond ordinance, and service agreement, these service fee and rental payments are legal, valid and binding obligations of the city. While the city does not pledge its full faith and credit and unlimited taxing power, the city covenants to provide for payment in its annual budget (same line item as General Obligation debt) and these payments are absolute and unconditional without being subject to any contingencies.

USE OF PROCEEDS

The 2018A bonds are being issued to finance certain energy savings projects for the Philadelphia Museum of Art. The 2018B bonds are being issued to refund the city's 2007 Series C bonds.

PROFILE

Philadelphia is the sixth-largest city in the US, with a population over 1.6 million. The city has a General Fund budget of $4.1 billion, and $3.6 billion (June 30, 2017) of tax-supported debt outstanding.

METHODOLOGY

The principal methodology used in these ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nicolanne Serrano
Lead Analyst
Regional PFG Northeast
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Leonard Jones
MANAGING DIRECTOR
Regional PFG Northeast
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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