Shortly after two of the top three credit rating agencies improved their outlooks for the city to stable from negative, Pittsburgh sold $114.5 million of general obligation bonds to provide funds for overdue capital improvement projects and save money through a refunding.
In last Tuesday’s sale, the steel city priced $71.2 million of new-money bonds — taking in about $80 million as investors paid a premium — and $43.2 million in a refunding. The new-money issue was Pittsburgh’s first in five years and its first under Mayor Luke Ravenstahl, although the city undertook a refinancing in 2008.
“The response to the bonds indicated a confidence in Pittsburgh and a recognition of the financial progress that has been made in recent years,” said city finance director Scott Kunka.
Pittsburgh, which expects roughly $4.8 million in present-value savings from the refunding, will pay 3.29% over 14 years. It was paying 5% on the old bonds.
“We were quite pleased, that’s for sure,” said deputy director of finance Cathy Qureshi.
Ravenstahl, City Council President Darlene Harris and other city leaders pitched representatives of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings for a better bond rating during a Jan. 13 visit to New York.
Less than a week later, Moody’s and Standard & Poor’s adjusted their outlooks to stable.
The trip drew fire from Pittsburgh’s state-appointed financial monitor, the Intergovernmental Cooperation Authority, which has overseen Pittsburgh’s finances since the city’s 2003 enrollment in the Act 47 program for distressed communities.
The agency had urged Ravenstahl not to make the trip because the ICA had yet to approve Pittsburgh’s 2012 fiscal budget and five-year plan, an Act 47 requirement.
“These efforts are not authorized nor appropriate,” wrote the ICA’s counsel, Clifford Levine of Pittsburgh law firm Cohen & Grigsby PC.
The city, he said, “must also provide satisfactory evidence of its ability to meet new debt obligations, over the entire repayment term, without negatively impacting its existing commitments and obligations.”
Levine called efforts to proceed with the financing “imprudent,” contrary to state law and “a material fact which should be disclosed to financial advisors, bond underwriters, rating agencies and investors.”
Ravenstahl and the group went anyway.
Moody’s and Standard & Poor’s announced their revisions a week later.
“When we were at their offices, S&P downgraded the entire country of France and several other European communities,” Harris said. “When you put that into perspective, the stable rating should also be considered a victory.”
It’s become more common for municipalities and states to sell themselves in person to the rating agencies, according to David Fiorenza, the former chief financial officer of Radnor Township, Pa..
Last September, for example, Massachusetts Gov. Deval Patrick, Treasurer Steven Grossman and other officials met with the three agencies at the State House in Boston. Days later, Standard & Poor’s raised the state’s GO rating to AA-plus from AA, making Massachusetts double-A plus across the board.
Three days after the upgrade, the Bay State sold $475 million of GOs.
“That was something unheard of until recently. Now communities invite the rating agencies, put on a dog-and-pony show and demonstrate improvements they have made,” said Fiorenza, now a professor at Villanova School of Business.
“Now that people have read about the bond rating improvements in Pittsburgh, that will be a trigger for other communities in Pennsylvania to make pitches to Moody’s, Fitch and Standard & Poor’s. There will be a domino effect,” he said.
“That’s always a good gut check, anyway. I always believed we should stay in contact with the rating agencies, to have them look at our city or town to see if our rating might go up or down, or should stay the same,” Fiorenza said. “It does cost a fee, but as I said, it’s a good gut check.”
Standard & Poor’s declined to comment on what impact, if any, Pittsburgh’s in-person visit had on the process. A Moody’s spokesman said such meetings are confidential.
The ICA did approve Pittsburgh’s $467 million budget on Jan. 24 after the City Council agreed to set up a trust fund for retired police officer and firefighter health benefits, and establish a committee to establish capital project priorities.
The council finalized those approvals last week.
The rating agencies praised Pittsburgh for its improved fiscal management in general, but more so, for taking steps to fix its pension problem.
According to Alan Schankel, a managing director at Janney Capital Markets in Philadelphia, Pittsburgh is generally in good shape.
“Their budget was OK. They just let their pension problem slip behind,” he said.
As of January 2009, the city’s combined pension plans were funded at merely 34%. A law passed that year requiring the state to absorb city plans if they remained at less than 50%, which would have forced a spike in Pittsburgh’s contributions. To counter that, the city boosted its pension funding levels to 62% as of last September by earmarking $736 million of parking tax revenues as a new funding source through 2041.
“While these actions place some pressure on reserve levels in the near term, we expect the city will retain sufficient financial flexibility over the medium term,” Moody’s said in its report.
Moody’s assigns an A1 rating to Pittsburgh’s GO bonds, while Standard & Poor’s rates them BBB. Fitch assigns an A rating.
“We base the outlook revision on our view of the city’s efforts to begin to address financial pressures associated with its pension system, although significant challenges related to the system’s funding remain,” said Standard & Poor’s credit analyst Richard Marino.
Boenning & Scattergood Inc. was lead underwriter on last week’s GO deal. Huntington Capital Markets was financial advisor. Pepper Hamilton LLP was bond counsel.
Since Ravenstahl became the city’s youngest chief executive at age 26 in 2006 when Bob O’Connor died while in office, Pittsburgh has paid down roughly $240 million of debt.
The new money will help pay for long-stalled capital projects, such as road paving, building maintenance and demolition.
“We’ve turned the financial page from one of junk ratings to A ratings, resulting in significant savings,” Ravenstahl said in a statement.
Schankel said Pittsburgh has clearly improved itself.
“It’s a good town with a diverse economy,” he said. “They’ve got health care. UPMC [University of Pittsburgh Medical Center] has a big operation. They have several great schools and PNC has a large presence. They’ve got good anchors economically.”
Pittsburgh’s oversight board, structured similarly to Philadelphia’s, and other elements of state oversight and support “have served Pennsylvania issuers and bondholders well,” Schankel said.
Philadelphia-based consulting firm PFM Group Inc. and Pittsburgh law firm Eckert Seamans Cherin & Mellott LLC have advised the city under its Act 47 recovery.
Fiorenza said Pittsburgh was wise to peg much of last week’s bond sale for refunding, given the low interest-rate environment.
He added that the city has also effectively tapped financing through the Pennsylvania Infrastructure Investment Authority, or PennVest, programs and community development block grants.
“I like what I see there. They’ve done a lot of economic development, and not just in infrastructure,” Fiorenza said.
However, much room for improvement remains, he said.
Fiorenza cited the city’s fund balance, which as a percent of expenditures stands at 7.2% for fiscal 2012 and is expected to drop to 5.4% by 2016.
“I’d like to see that, as a best-practices thing, up around 10%,” he said.
Debt service is the city’s second-largest expense at 19%, ranking it second to public safety, which is at 31%, and higher than public works.
Fiorenza said 10% would be more ideal in that category as well.
According to Fiorenza, Gov. Tom Corbett’s administration is more city-neutral, unlike Corbett’s predecessor, former Philadelphia Mayor Ed Rendell. That could serve cities like Pittsburgh and Erie well, he said.
“I’m not saying that Gov. Rendell wasn’t a good governor. I’m just saying that he governed from a Philadelphia frame of reference,” Fiorenza said.
“I don’t see [Corbett] picking and choosing.”
