PhillyDeals: Analyst: More Phila. school cuts would hurt bond rating

Posted: January 14, 2014

The Philadelphia School District has cut all the programs it can afford to cut without scaring away not just more students, but also the bond-buying investors the schools depend on to finance operations, Moody's Investors Service analyst Michael D'Arcy warned in a report to clients last week.

More program cuts will drive city students to charter, Catholic, private, or suburban schools, reducing state and federal school payments and obliging the credit-rating agency to cut the district's bond rating, according to the report.

Moody's said it will cut its Ba2 credit rating for the school district's $3.4 billion debt - boosting borrowing costs - unless state and city funding officials, school financial managers, and labor unions agree on plans to curb the cycle of overspending and program cuts.

Recent borrowing and last summer's state budget deal gave the district "an opportunity to stabilize operations and restore reserves, but the district's ability to achieve these goals is unclear," D'Arcy wrote. He blamed past school administrators' poor planning, and didn't seem too confident that the state-controlled, unpaid School Reform Commission board that now oversees the schools is up to the job.

Moody's expects that the district will close more schools in 2015 and 2016, boosting public "frustration."

Not at home

Philadelphia-based Equus Capital Partners Ltd. has just raised another $310 million - Number 11 in a series of funds totaling $3 billion - to buy U.S. commercial real estate for its government, corporate, wealthy-family and union-pension clients.

But chief executive Daniel M. DiLella says his firm hasn't bought any Philadelphia properties with the money. "We've been looking in this city. We just can't make the numbers work," he said.

Philadelphia contractor costs and union pay and benefits are comparable to those in other East Coast cities. But taxes and other fees are as much as double what landlords pay in the suburbs, DiLella says. And Center City office rents are mostly lower than what high-end spaces lease for in Radnor or West Conshohocken - and half or less of what building owners get in New York, Boston or Washington.

That's why Philadelphia builders always ask for state subsidies and city tax breaks, DiLella noted. Even with taxpayer help, he said, most modern Philadelphia skyscrapers have been sold by their original owners at a loss, with the exception of the PNC and Comcast buildings with their long-term blue-chip tenants.

Citing a recent report by Paul Levy's Center City District that shows Philadelphia employment has lagged other big U.S. cities, DiLella said Mayor Nutter and City Council aren't the kind of leaders to make the changes needed to attract growth - or more investments from big-dollar buyers.



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