An improved Philadelphia economy drove the city’s long-struggling school district to an underlying investment grade rating from Moody’s Investors Service for the first time since 1977.
Moody’s Investors Service upgraded the Philadelphia School District’s underlying bond rating two notches to Baa3 from Ba2 with a stable outlook Tuesday citing the city’s fiscal momentum and strengthening governance following the enactment of a new mayor-appointed school board in July.
The district’s end to a 41-year streak of being rated junk by Moody’s occurred five weeks after the ratings agency placed it on
“Approximately 40 percent of district revenue is derived locally and the economy of the city is directly related to school district financial performance,” Moody’s analyst Nicolanne Serrano wrote in her report. “The upgrade is further informed by the city's commitment of new, permanent, revenues to the school district as of summer 2018, which largely eliminates the district's previously projected deficits over the next five years.”
Serrano noted that the district has also benefited from strong senior leadership, a stabilization of the city’s charter school population and strong legal protections for bondholders under the Pennsylvania School District Intercept Program, which Moody’s rates at A2. The district still must contend however with a “relatively narrow” fund balance not expected to materially improve in the near-term, according to Moody’s.
“This unprecedented two-notch upgrade reflects the collaboration of stakeholders across this city,” William Hite, the district’s superintendent of schools, said in a statement. “Over the past few years, the District has been steadily working to ensure our schools across the city are equipped with the resources they need to be successful while maintaining fiscal stability.”
The state-dominated School Reform Commission ran the Philadelphia School District for more than 16 years before the city
“Investment grade bonds are open to a much larger number of investors, which should decrease our borrowing rates for short and long-term debt going forward,” Uri Monson, chief financial officer for the Philadelphia School District, said in a statement. “The result will ultimately be millions of dollars in interest savings which can be reinvested in our schools.”
Serrano said the district’s debt is expected to “modestly increase” in the short term because of a sizable capital plan. The district’s debt portfolio currently includes $2 billion of general obligation bonds and $998 million of lease revenue bonds issued through the State Public School Building Authority. The district’s outstanding debt totaled $3.2 billion following a $252.92 million
“Philadelphia School District's credit position continues to improve, marked by three consecutive years of operating surpluses and a commitment of permanent tax revenues from the city of Philadelphia that largely eliminates the District's previously anticipated deficits in the near term,” said Serrano. “The District's governance is now more closely tied to that of the city given the return to local control, and we anticipate a better alignment of city and School District interests as a result.”
The City of Philadelphia has GO bond ratings of A2 by Moody’s, A-minus by Fitch and A by S&P Global Ratings. Moody’s revised the city’s credit outlook to stable from negative on Nov. 9 to reflect strengthening economic conditions and improved finances.
