After months of speculation and growing worry over the city's cash-flow position,Pittsburgh's underlying general obligation debt rating tumbled five notches yesterdaywhen Standard & Poor's dropped it to BB from A-minus, citing a recently releaseddisclosure statement.
The downgrade affected about $879 million in outstanding debt, which was also placed oncredit watch with developing implications.
In a statement, the rating agency said Pittsburgh - Pennsylvania's second-largest city -was no longer worthy of investment-grade status following the release of the city's 2002Comprehensive Annual Financial Report.
The report states that while the city "has no plans at this time to seek relief underChapter 9 of the Federal Bankruptcy Code," it could consider "a number of options,"including those available under Chapter 9 if it does not receive new taxing authorityfrom the commonwealth and is not granted City Council approval for tax increases andservice cuts."
"That crossed the line," said Karl Jacob, a director at Standard & Poor's who saw thereport Tuesday. "We can't have an investment-grade rating, no matter how remote thepossibility [of bankruptcy], with that."
Pittsburgh, facing a $60 million gap in its $386 million budget, started the fiscal yearon a rocky footing and has flirted with insolvency for several months. Through a debtrestructuring in April and about 700 layoffs announced in August, city leaders were ableto whittle that shortfall down to $34 million. Officials also tapped into its rainy-dayfund for an additional $28 million to see it through the end of December.
Pittsburgh is also awaiting word on enabling legislation pending in Harrisburg thatwould allow the city to stimulate new revenues by raising its occupation tax andimplementing a .45% payroll preparation tax.
Tom Flaherty, Pittsburgh's controller, characterized the delay from Harrisburg as "pureand simple politics." The Republican majority in the legislature, Flaherty said, ispushing for the city to make more draconian service cuts, although Democratic Mayor TomMurphy has already shut down senior centers and recreation facilities and is consideringclosing seven firehouses. Merging the city's fire and emergency medical technician unitsfor a saving of $15 million is on the table as well.
"This is certainly calamitous, and I hope that this would be another indicator to thestate that it needs to get off the dime and get Pittsburgh some financial help,"Flaherty said of the downgrade.
The controller, whose office generated the 2002 CAFR, expects Pittsburgh to break evenby the close of the fiscal year, which ends Dec. 31. Murphy is scheduled in mid-Novemberto introduce two version of the 2004 budgets - one that factors in state action on itsenabling legislation and one that does not.
"We will literally be like the car sputtering into the gas station on Jan. 1," he said."But, next year, it's going to be doomsday."
Noting that the city was nearly three-quarters of the way through fiscal year 2003 andstill grappling with a structural budget deficit, Standard & Poor's put Pittsburgh oncredit watch negative in late August. A few weeks later, Moody's Investors Serviceplaced Pittsburgh's A3 under review for possible downgrade, and Fitch Ratings putPittsburgh's A-minus rating on negative watch.
Jacob pointed out that Cranston, R.I.'s GO debt - with an underlying rating of B - isalso in junk territory.
News of the downgrade apparently did little to ruffle secondary municipal markets, wheretrading of Pittsburgh GO bonds has been sparse.
"I haven't seen Pittsburgh GOs trade in weeks," said Don Currie, head of municipaltrading for PNC Capital Markets in Pittsburgh. "People have known that the city hadfinancial problems for quite some time, and that may have created a dearth of trading."
Other municipalities that have faced insolvency include Bridgeport, Conn., which filedfor bankruptcy protection in 1991 and entered a four-year period of state oversight, andNew York City, which was on the brink of bankruptcy when Municipal Assistance Corp. wascreated in 1975 to help it raise new capital. In 1994, Orange County, Calif., lost $1.6billion in risky investments and sought protection from its creditors in what was thenthe largest municipal bankruptcy filing in U.S. history.
