City health sets Philadelphia School District closer to upgrade

Philadelphia’s improved fiscal conditions have positioned the city’s junk-raked school district for a rating boost.

Moody’s Investors Service placed its Ba2-rated Philadelphia School District bonds on review for an upgrade Tuesday, citing the city’s strengthening economy and increased tax support for the school system.

Philadelphia assumed local control of its cash-strapped school district for the first time since late 2001 on July 1 and Mayor Jim Kenney has pledged $1 billion to the public schools over the next five years to tackle a projected $900 million deficit.

“The school district's credit profile has continued to strengthen, as evidenced by its improved financial position over the last few years,” wrote Moody’s analyst Nicolanne Serrano. “Its charter enrollment has largely stabilized and management is prudent and effective.”

Moody’s upgraded the district one notch to Ba2 in September 2017 due largely to improved reserves. Fitch Ratings rates the district’s debt one notch lower than Moody’s at BB-minus with a stable outlook.

Serrano said the review for upgrade announcement was triggered in part by Moody's recently revising the credit outlook for its A2 rating on Philadelphia general obligation bonds to stable from negative reflecting the city's strengthening economy and enhanced financial position. The city's debt is rated A-minus by Fitch Ratings and A by S&P Global Ratings.

The Moody’s review for upgrade applies to the district’s GO and lease-backed revenue bonds as well as all underlying school district bond ratings. The district's GO bonds are secured by the district's full faith, credit and taxing power. The lease-revenue bonds are backstopped by lease payments made by the district to the State Public School Building Authority.

Serrano said the district would be in line for an upgrade if it achieves near-term structurally balanced operations with continued improvement building up reserves and charter school enrollment continues to stabilize. Any reduction of city committed revenues or a further expansion of the city’s charter school population not coupled with significant expenditure cuts could mean a possible downgrade, according to Moody’s.

"This is obviously the first step in a process, but the School District of Philadelphia is pleased that our continued financial stability is driving both rating agencies and investors to take a closer look at our fiscal strength,” said district spokeswoman Megan Lello.