Philadelphia's outlook was revised to negative from stable by Moody's Investors Service, which cited concerns about weakened reserves in the nation's fifth-largest city.
Moody's analyst Jennifer Diercksen said in the late Tuesday report that reserve declines are projected through the 2018 fiscal year with a general fund balance that is just over 1% of revenues forecasted. Moody's affirmed the A2 rating on $1.5 billion of outstanding general obligation debt.
"While the city conservatively budgets and revenues have been on an upward trend, expenditures continue to outpace revenue growth," said Diercksen. "Going forward, any additional declines in reserves beyond current projections will result in negative credit pressure."
Diercksen said Philadelphia could get downgraded if the city is unable to achieve a structurally balanced budget and continues to draw on reserves. Pennsylvania's largest city also faces challenges funding its pension plan and providing support to the Philadelphia School District that could reduce the city's financial flexibility, according to Diercksen.
Michael Dunn, a spokesman for Philadelphia Mayor Jim Kenney, said in response to the Moody's action that a new five-year plan outlined in March is aimed at enhancing the city's reserve levels.
"We crafted a five-year plan that will grow the fund balance and ensure a strong fiscal future for the City," said Dunn in a statement. "It's important to also note that this five year plan is one of the most realistic in recent memory, as it accounts for increased labor, benefit and pension costs."
Philadelphia experienced four upgrades under previous Mayor Michael Nutter the last coming in December 2013 with a one-notch jump by S&P Global Ratings to A-plus. Fitch Ratings rates Philadelphia bonds A-minus.
Philadelphia may also face additional fiscal pressures from New Jersey Gov. Chris Christie's decision to revoke a tax reciprocity agreement with Pennsylvania, according to Janney Capital Markets municipal credit analyst Eric Kazatsky in a Sept. 7 report addressing the Moody's revision. Kazatsky noted that ending the nearly four-decade tax pact would entitle Philadelphia residents working in New Jersey a credit against the city's income tax with preliminary estimates showing a $50 million annual loss in revenue.
