NEW YORK--(BUSINESS WIRE)--Fitch assigns a 'BBB+' rating to Philadelphia, Pennsylvania's (the city) approximately $203.8 million general obligation (GO) refunding bonds, series 2008A. The bonds are scheduled for negotiated sale the week of April 14. Bond proceeds will refund the city's outstanding GO bonds, series 2003B-1 and series 2003B-2, which were issued as auction-rate securities. In addition, Fitch also affirms its 'BBB+' rating on the city's $1.1 billion in outstanding GO bonds. The Rating Outlook is Stable.The 'BBB+' rating on the GO debt is based upon the city's limited financial flexibility, exceptionally high debt levels, significantly under-funded pension position, a rapidly growing fixed-cost burden related to employee benefit and health care costs, and below-average economic indicators. The rating also considers the city's stable employment base, anchored by a strong education and health care sector. While financial results have returned to positive in recent years, leading to a favorable increase in general fund reserves, the city's practice of only funding the minimum municipal obligation (MMO) for its pension fund has exacerbated an already declining funding ratio, which dropped to a very low 51.6% according to the most recent actuarial valuation.
Fitch notes that the city performed better than its financial multi-year plan (MYP) projections in each of fiscal years 2005-2007 as several tax sources performed at above-budgeted levels, leading to a favorable increase in reserves. However, much of the overall gain in revenue was driven by growth in economically sensitive business privilege and real estate transfer taxes, and overall financial flexibility remains limited. In addition, Fitch remains concerned regarding the most recent MYP, which includes revenue assumptions that may prove difficult to achieve amid continued annual cuts in the city's primary tax revenue sources and a downturn in the local real estate market and overall economy. Nearly half of all general fund revenue is derived from a combination of the wage tax and real estate-related revenue sources. While concern exists about the assumptions built into the MYP, Fitch believes the tax reductions should enhance the city's ability to attract and retain residents and businesses.
The city's December 2007 unemployment rate, measured at 5.8%, has declined notably after peaking at 7.5% in 2003. The employment base is heavily weighted toward the education and health services sector, driven by the University of Pennsylvania's role as the city's largest employer. Ongoing commercial and retail development projects, occurring primarily in the downtown area, include the recent completion of the new Comcast headquarters, which together with other ongoing projects, will add an estimated 1.25 million square feet (sf) of office space and 32,000 sf of retail space to the downtown area. Children's Hospital of Philadelphia and the University of Pennsylvania are each making a significant capital investment to expand their respective research facilities, and the city's Navy yard is transitioning into a large private sector business park that includes 80 companies. However, despite the city's economic gains, economic indicators remain below-average as the unemployment rate still ranks above the state and the nation, and approximately one-fourth of the city's residents live at or below the poverty rate according to the U.S. Census Bureau.
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