Credit Rating Plunges Phila.'s Lowest Of Major Cities

Posted: June 16, 1990

In another sign of the city's deepening financial predicament, Standard & Poor's Corp. yesterday reduced its credit rating for Philadelphia bonds to the lowest level considered safe for investors.

The Wall Street firm dropped the rating two notches, from BBB+ to BBB-. Standard & Poor's officials said that Philadelphia was the only major city with a credit grade that low.

The decision means that the city government will have to pay higher interest rates to raise money on the capital markets. City officials and private financial experts said the added cost to taxpayers could be millions of dollars per year.

In an analysis distributed to investment services, news organizations and others, Standard & Poor's noted that the city has run budget deficits the last two fiscal years and that a shortfall of $60 million is forecast for the fiscal year ending June 30.

The company also expressed grave reservations about the recently adopted budget for fiscal 1991, saying that the failure of City Council and the Goode administration to agree on a package of tax increases "does not bode well for restoration of fiscal stability."

The report said there was "a likelihood of another imbalance" in fiscal 1991, which begins July 1.

BBB- is Standard & Poor's lowest category of "investment-grade" securities - those considered safe to recommend to investors. The other major rating firm, Moody's Investors Service Inc., also places Philadelphia bonds at the bottom of its investment-grade scale, with a rating of Baa.

Moody's is re-evaluating the rating, and company officials said they expected to decide by the end of the month whether to lower it.

Mayor Goode, in Chicago for a meeting of the U.S. Conference of Mayors, said the Standard & Poor's decision stemmed from Council's refusal to enact the tax increases he has sought.

In presenting his fiscal 1991 budget in March, Goode asked Council for a 10.5 percent boost in the resident wage tax, already the highest in the country, to help close a projected $195 million deficit. Council members rejected the idea, opting instead for deep spending cuts.

Council did adopt a 0.5 percent local sales tax proposed by the mayor, but the levy cannot be collected unless it is approved by the state legislature. No action is expected until after the gubernatorial election in November, and legislators may vote down the tax.

"We've had two years without additional revenues," Goode said. "That doesn't bring about the kind of stability the rating agencies want to see."

Councilman John F. Street, who is chairman of the Appropriations Committee and spearheaded opposition to the wage-tax increase, could not be reached for comment.

The credit rating applies to general obligation bonds sold by the city to finance capital projects and meet short-term cash needs. Yesterday's decision will not affect the interest rates the city pays to current bond holders, but it will make investors reluctant to buy future issues - unless they can earn a higher yield.

In addition, some pension funds are prohibited under their bylaws from purchasing securities rated below a certain grade.

Finance Director Betsy C. Reveal said that the city sells $350 million to $400 million in long- and short-term bonds per year. She predicted that in order to find purchasers, the city would have to pay a premium of three-tenths to half of a percentage point above market interest rates.

Thus, if the prevailing rate for bonds rated BBB+ was 6 percent, Philadelphia would pay 6.3 percent to 6.5 percent, she said.

In the past, Reveal has estimated that debt-service payments would rise $10 million to $15 million per year if the city's credit rating fell below investment grade. She declined yesterday to say how much the drop to BBB- would cost.

Reveal and other analysts stressed that the change could have impact far beyond financial markets, making Philadelphia appear less attractive as a place to live and do business. She said it was important for the city to find a solution to the financial crisis and regain the higher rating as quickly as possible.

In explaining its decision, Standard & Poor's said Philadelphia suffered

from a "chronic fiscal imbalance" that recent budget deliberations between Council and the Goode administration did nothing to alleviate.

Hyman C. Grossman, a managing director of the rating firm, said that the $2.1 billion budget adopted by Council last month makes no provision for the likelihood that police officers and firefighters will be awarded pay raises as a result of arbitration now under way.

In addition, he said, the administration may be ordered to return $25 million collected under a 1988 increase in the real estate transfer tax. The increase is being challenged in court. No money was set aside in the budget to pay for refunds.

Grossman said that the sales tax, even if approved by the legislature, would bring in only half the projected $45 million, because lawmakers are unlikely to act until late this year, when fiscal 1991 will be half over.

Reveal said the impact of the decision in investment circles would be softened somewhat by the fact that several other governments - including New York State and North Carolina, New York City and the District of Columbia - recently had their credit ratings lowered.

BOND RATINGS

Here are the equivalent ratings of two major bond-rating firms. Philadelphia's bonds are rated Baa by Moody's Investors Service. Standard & Poor's Corp. lowered the city's rating from BBB+ to BBB-, its lowest investment-grade rating.

EXPLANATION MOODY S&P

INVESTMENT GRADE

Gilt-edged Aaa AAA

High quality Aa AA

Upper-medium A A

Medium grade Baa BBB

SPECULATIVE

Mostly speculative Ba BB

Low grade B B

Poor to default Caa CCC

Highly speculative Ca CC

No interest C C

NOTE: S&P may use + or - to modify some ratings. Moody's uses the numbers 1 (highest) through 3 in the range from Aa1 to Ca3. Both services rate bonds in default, in arrears or of questionable value as D through DDD.

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