Philadelphia Authority for Ind. Dev., PA — Moody’s assigns A3 to the City of Philadelphia, PA’s $135 million City Service Agreement Revenue Refunding Bonds, Series 2021

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Rating Action: Moody’s assigns A3 to the City of Philadelphia, PA’s $135 million City Service Agreement Revenue Refunding Bonds, Series 2021Global Credit Research – 05 Mar 2021New York, March 05, 2021 — Moody’s Investors Service has assigned an A3 rating to the City of Philadelphia’s, PA’s $135 million City Service Agreement Revenue Refunding Bonds, Series 2021 (Federally Taxable). We maintain an A2 rating on the City of Philadelphia’s General Obligation bankruptcy debt as well as an A2 rating on its outstanding service fee and lease revenue bonds (non-pension related). We further maintain an A3 rating on the city’s 1999 and 2012 pension obligation bonds, a portion of which will be refunded with the Series of 2021 issuance.The outlook is stable for all long-term rated securities.Approximately $3.956 billion of tax-supported debt is outstanding for the city as of the June 30, 2020 fiscal year end.RATINGS RATIONALEThe city’s A2 GOULT rating considers its substantial and diverse economy and currently pressured financial position. At this time, the city continues to project material near-term economic and financial stress due to coronavirus-related business closures and stay-at-home orders. These restrictions have adversely impacted several of the city’s revenue streams, particularly its economically sensitive wage and business income taxes. Further, though the city acted quickly to curtail employee costs at the start of the pandemic outbreak, other costs have increased during the period, leading to two successive years (fiscal 2020 and 2021) of material projected operating deficits. Assuming that actual performance during the remainder of fiscal 2021 tracks closely to budget projections, the city would see an erosion of fund balance to just 1.5% of revenues – a precarious reserve position for a city of Philadelphia’s size.The city benefits from a diverse economy that has grown considerably in recent years, though one of its primary anchoring industries – higher education – is driving some of the overall weakness in the city’s wage tax collections. Future reviews will consider whether the city’s core industries are able to quickly rebound from pandemic-related closures once normal operations resume. A key positive rating driver for the city, especially in the current operating environment, is its demonstrated strong governance controls and prudent budget practices. The city has consistently outperformed projections over the last several years, and budget assumptions are generally conservative. Further, the city’s reserve position was relatively strong prior to the onset of coronavirus, as compared to its positioning prior to other periods of recession. We expect Philadelphia’s overall credit profile to remain stable as it weathers the pandemic and its aftereffects.The A2 rating on the city’s outstanding service fee bonds (non-pension related) and lease revenue bonds reflects the strong legal structure clearly laid out within the city’s home rule charter, bond ordinances, and service fee/lease agreements. As stated in the documents, these service and lease rental payments are legal, valid and binding obligations of the city, payable out of current city revenues. 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. For these reasons, we do not differentiate regarding essentiality and render them in the same band of credit quality as an ad valorem pledge.The A3 rating on the city’s outstanding pension obligation bonds (POB) reflects the additional risk of a higher loss given default for these securities relative to the city’s other service-fee and lease-rental debt. The POB debt originally funded a portion of the unfunded liability for the city’s retirement system and are not secured by the city’s unlimited taxing power. While the bonds carry the same security pledge as the city’s other service agreement and lease bonds, we have notched these bonds based on purpose, as historically, pension bonds have realized less of a recovery in bankruptcy scenarios than other debt.RATING OUTLOOKThe rating outlook is stable. We expect that city management will continue to prudently meet revenue shortfalls with budget cuts and other offsets that will enable Philadelphia to navigate its fiscal challenges without a material change to its long-term credit profile. However, as our understanding of the prolonged economic impact of coronavirus continues to evolve we will update our outlook accordingly.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING- Growth in reserves and maintenance of fund balance at levels more commensurate with large city peers- Sustained expansion in the tax base and strengthening of the socioeconomic profile- Substantial decrease of unfunded pension liabilitiesFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING- Inability to regain structural balance in the near term- Reserve draws that exceed current expectations leading to a deficit fund balance- Emergence of a material strain on the city’s liquidity- Increased support to school district beyond current expectations reducing the city’s financial flexibility- Failure to fund pension plan on sound basis going forward- Change in legal structure for bonds that are not backed by the city’s General Obligation pledgeLEGAL SECURITYThe city’s service fee bonds are legal, valid and binding obligations of the city, payable from current city revenues. 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. These payments are absolute and unconditional without being subject to any contingencies.USE OF PROCEEDSProceeds from the Series 2021 bonds will be used to advance refund (on a taxable basis) a portion of the city’s 2012 and 1999 Pension Obligation Bonds.PROFILEThe city of Philadelphia, located along the southeastern border of the Commonwealth of Pennsylvania (Aa3 stable), is the largest city in the commonwealth and the sixth largest city in the United States with approximately 1.579 million residents (based on 2019 estimates).METHODOLOGYThe principal methodology used in this rating was US Local Government General Obligation Debt published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260094. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.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. 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 Michael Wertz Additional Contact 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY’S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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