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Rating Action:

Moody's assigns Baa3 UND / A2 ENH to Philadelphia School District, PA's GO Bonds, Ser.of 2021; outlook stable

14 Sep 2021

New York, September 14, 2021 -- Moody's Investors Service has assigned a Baa3 underlying and A2 enhanced ratings to Philadelphia School District, PA's $265 million General Obligation Bonds, Series A of 2021 and $50 million General Obligation Bonds, Series B of 2021 (Green Bonds). Concurrently, Moody's has affirmed the Baa3 underlying ratings on roughly $2.18 billion of General Obligation (GO) debt and $915.9 million of Lease debt outstanding as of June 1, 2021. Moody's has also affirmed the district's Baa3 issuer rating. The issuer rating represents the district's ability to repay debt and debt-like obligations without consideration of any pledge, security, or structural features. The rating outlook is stable.

RATINGS RATIONALE

Philadelphia School District's Baa3 GO and Lease ratings, as well as its Issuer rating, reflect the district's satisfactory current financial position, with an expected (cash-based) fund balance of 5.4% of revenue at fiscal year-end 2021. The district has received considerable financial aid from the federal government through the Coronavirus Aid Relief and Economic Security (CARES) Act and is eligible to receive an additional $1.14 billion of federal funding through the American Rescue Plan Act (ARPA). While a financial boon to the district - one that will enable Philadelphia schools to put considerable resources towards learning loss, the emotional and social needs of its students, and also its aged infrastructure - the federal funding is an additional revenue source to the district's own local and state tax revenue, which held up fairly well throughout the pandemic. The district is particularly dependent on real estate taxes as part of its total local funding, and favorably, property tax collections remained strong during the 2020 and 2021 fiscal years. Further, state aid - about 49% of the district's total revenue - also remained stable despite some fiscal challenges at the commonwealth level. Overall, the district's experience during the pandemic speaks to a more solid and stable revenue structure than experienced during prior times of economic stress.

The Baa3 rating also reflects the district's strong management, which has demonstrated a detailed understanding of charter pressures, a collaborative approach to planning around charter enrollment and its impact on demographics and district school costs, and also a highly effective governance of the district's finances and budgeting which will be key to the administration of federal aid over the next three years. The Baa3 rating incorporates the district's deeper ties of shared governance with the city of Philadelphia (A2 stable), and a resultant operating environment that is more supportive of the district since the reinstatement of a mayorally-appointed board in 2018.

The district's general obligation unlimited tax and lease-backed debt both carry the district's full faith and credit pledge, and both security types are rated on parity to each other and carry the Baa3 rating.

The A2 enhanced rating reflects our current assessment of the Pennsylvania School District Intercept Program, which provides that state aid will be allocated to bondholders in the event that the school district cannot meet its scheduled sinking fund deposit dates. The A2 rating reflects the district's direct-pay arrangement with the state for its lease debt, and the engagement of a fiscal agent for its general obligation debt, which would ensure timely notification to the state in the event of a debt service deposit shortfall.

School district borrowers in the Commonwealth are entitled to the benefits of the intercept provisions of the Pennsylvania School Code of 1949. Pursuant to Section 633 of the code, in the event that a school district is unable to meet its sinking fund deposits for its debt service obligations, the state will withhold aid due to the district and divert that aid to bondholders until the deficiency is cured. The state is authorized to intercept all forms of aid appropriated to the school district during the current fiscal year. The A2 enhanced rating incorporates the intercept program's demonstrated state commitment and program history, and satisfactory program mechanics, including a paying agent. State aid to Philadelphia School District in 2020 covered all of its debt service requirement by a healthy margin.

RATING OUTLOOK

Key to the district's stable outlook is its detailed planning and robust management controls, which we expect will provide for a stable operating environment in the near term. The outlook also reflects an expectation of financial resiliency through the coronavirus pandemic and a thoughtful deployment of federal dollars over the next several years.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Substantial improvement in liquidity and reserves coupled with further stabilization of charter enrollment

- Further strengthening of city / district relationship; continued willingness of city to raise revenue in support of the district

- Upgrade of the Commonwealth of Pennsylvania (Aa3 stable), which impacts the intercept program rating (enhanced)

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Material decline in the school district's liquidity position

- Inability to maintain structural operating balance leading to material draws on fund balance

- Further expansion of charters; deterioration of district enrollment not coupled with expenditure cuts

- Any change in the city's commitment to and support of the district; a change in the city's credit profile

- Downgrade of the Commonwealth of Pennsylvania (Aa3 stable), which impacts the intercept program rating (enhanced)

- Materially reduced state aid that is insufficient for adequate debt service coverage (enhanced)

LEGAL SECURITY

The district's General Obligation bonds are general obligations of the district and carry its full faith and credit pledge. The bonds benefit from a lock-box structure, originally established in 1982, that requires daily sinking fund deposits of the district's local taxes (property, business use and occupancy, liquor, and non-business income taxes). The General Obligation bonds are also secured by the state intercept, governed by Section 633 of the PA School Code and stipulated in the district's fiscal agent agreements, that would be triggered 15 days prior to the debt service or sinking fund payment due date if the sinking fund was not fully funded. The state intercept mechanics only require 10 days for payment, which would ensure debt service would be paid prior to a default.

USE OF PROCEEDS

The proceeds of the Series 2021 A and B Bonds will be used to support various capital projects throughout the district.

PROFILE

Philadelphia School District is the largest public school district in Pennsylvania and the thirteenth largest in the country. The district operates more than 200 schools with enrollment of 201,849 (includes 79,401 students in charters and alternative schools) as of fiscal year 2021.

METHODOLOGY

The principal methodology used in the underlying ratings was US K-12 Public School Districts Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1202421. The principal methodology used in the enhanced ratings was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1067422. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

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Tatiana Killen
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No Related Data.
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