Wall Street boosts Philly’s credit rating to A1 as vote on rainy-day fund nears

Despite the threatened economic slowdown, Philadelphia’s rise in real estate values since 2020 and its better pension funding have convinced Wall Street to boost the city’s credit rating, easing its borrowing costs.

Moody’s Investors Service vice president Nicole Serrano published a report April 27 boosting the city’s credit rating a notch, to A1, from A2. The move came just in time for the city’s next planned $120 million bond borrowing — and a May 16 referendum on packing more tax revenues into a rainy-day reserve.

That’s below the top ratings assigned to wealthy suburban Chester and Montgomery Counties, but it’s still the best Philadelphia’s credit has looked since 2012, when its rating was cut after running a deficit and delaying pension payments, as tax collections slipped.

Rival Standard & Poor’s on April 20 said it was considering a similar Philadelphia upgrade, lifting the city to its equivalent AA rating, if the city continued its “conservative” tax and funding practices.

The upgrades would put Philadelphia’s credit on a level with New York City’s, shaving an estimated $7 million off the total interest costs of its annual general-obligation bond borrowings, among other gains, according to a February analysis for City Council by Econsult Solutions Inc.

That’s a modest savings from its multibillion-dollar annual budget, but also a signal to employers, taxpayers, and those who use city services that the city is not under heavy pressure to boost taxes and cut services, as it did after the last recession.

Investors accept lower interest on bonds they buy from high-rated cities and other borrowers, because those bond issuers are considered more likely to repay the money, plus the interest.

To avoid layoffs and program cuts when tax revenues periodically fall, the city has promised to boost its “Budget Stabilization Reserve,” which it built back to $25 million last winter after spending all $34 million in the fund early in the pandemic. The city says it now plans to keep boosting the reserve.

The first ballot question facing voters in this month’s primary would make it easier to set aside cash when Philadelphia runs a surplus (or “balance,” as city officials prefer to call it), with revenues ahead of spending, according to Councilmember Katherine Gilmore Richardson, who sponsored the proposal.

“I was so pleased” to see the rating agencies’ positive reports, she said Thursday. “Our rainy-day fund will actually save the city money,” because a higher bond rating means lower interest rates.

Under the current City Charter, the city puts 0.75% of its budget revenues into the reserve when its surplus is over 3%.

The referendum would increase those payments, depending on how big the surplus gets. When it tops 8% of the budget, all additional surplus would go straight to the reserve. Once in the reserve, funds can only be removed with a two-thirds vote of City Council, or state action, and a certification from the city’s finance director.

The city’s current surplus, still swollen by federal pandemic funds and real estate tax collections, is over 10%. But Moody’s said the amount set aside as a rainy-day reserve is still “slim.” A September 2021 report by PICA, the state agency that monitors city finances, said all but two of 18 large cities had bigger reserves than Philly.

The Moody’s report also highlights how Wall Street investors and analysts view the city’s current condition and its prospects.

According to the Moody’s analysts, Philadelphia has fewer wealthy residents and more poor people than other big cities, and the poor “have not benefited” from the city’s impressive recent growth in employment and property values. The city also suffers from a “weak public school system.”

The analysts applauded efforts to protect the rainy-day reserve from “potential political noise.”

Moody’s said it will cut the city’s credit rating if it fails to keep putting money aside, or stops paying extra into the pension plan to reduce that plan’s deficit.

Moody’s is also skeptical of the city’s plan to pay down its pension deficit by 2033. Noting the city expects to average 7.4% on its investments each year, the credit analysts say a 4.5% target would be more realistic; so even with today’s high level of city pension contributions, which cost more than Philadelphia spends on police, it could take many more years to pay the deficit down.

The analysts note that Philadelphia has lost population during the pandemic, but only at roughly half the rate of New York or Washington, D.C. It benefits from a few large construction projects, such as at the Hospital of the University of Pennsylvania and Children’s Hospital of Philadelphia.

And, the city has enjoyed a revival of its long-decayed manufacturing sector, with factory production jumping more than 35% from 2011-21. That’s four times faster than the city’s large education and health-care sectors grew and also faster than finance, technology, and other business services.

But, they concluded, “Philadelphia’s stubbornly high poverty level is a serious and long-standing concern, and the city continues to grapple with a substantial uptick in violent crime and gun violence.” Those factors could cut the city’s credit rating, if people avoid the city “due to the real or perceived threat of crime.” And a recession that cuts property values and jobs will also slice city revenues, they conclude.