Fitch Ratings assigns an 'A+' rating to the Pennsylvania
Intergovernmental Cooperation Authority's (PICA) approximately $133.7
million special tax revenue refunding bonds (City of Philadelphia
Funding Program), series 2008A and $80.8 million special tax revenue
refunding bonds, series 2008B. Bond proceeds will be used to currently
refund outstanding series 2003 and 2006 special tax revenue bonds. The
bonds will price via negotiation on May 14. At this time, Fitch upgrades
PICA's $622.5 million outstanding special tax revenue bonds rating to
'A+' from 'A'. The Rating Outlook is Stable.
The upgrade to 'A+' on PICA's bonds is based on the strength of pledged
revenues, which have demonstrated a consistent trend of healthy growth
leading to a favorable margin of coverage on annual debt service. Fitch
believes debt service coverage levels should remain consistently strong
going forward given the statutory limitation on new debt issuance by
PICA coupled with a declining debt service schedule until all
outstanding debt matures in 2022. The rating also reflects the legal
protections insulating the revenue stream from the City of Philadelphia
(the city) and the commonwealth and is in part based upon the city's
economic health and financial condition (general obligation (GO) bonds
rated 'BBB+' with a Stable Outlook by Fitch).
PICA was created in 1991 to assist the city in its financial recovery.
PICA has broad powers to review and approve city budgets and multi-year
financial plans and can certify noncompliance to the state, which would
result in withholding of certain state aid. PICA was given statutory
authority to issue wage tax secured bonds to fund the operating deficits
and capital expenditures of the city. At this time PICA has exhausted
its borrowing authorization; any additional issuance not for refunding
purposes would require board consent and legislative approval by the
commonwealth. PICA reports that it has no plans to seek additional
authorization.
The special tax revenue bonds are secured by a 1.5% tax on the salaries,
wages, commissions and other compensation earned by residents of the
city and on net profits earned in business, professions and other
activities conducted by residents of the city. The 1.5% tax is
exclusively for the use of PICA and the city and commonwealth have
covenanted not to reduce the tax so long as PICA bonds are outstanding.
The city acts as collector of the authority tax in an agency capacity
under an intergovernmental agreement with the state revenue department.
At all times, the tax revenues remain the property of PICA. After
payment of debt service and any subordinate payments, residual revenues
flow to the city. Authority tax revenue has increased by an average of
3.7% annually since 2002, due in large part to growth in wages and
improved tax collections over that time period. Coverage of maximum debt
service (MADS), which occurs in 2009, was strong at 4.6 times (x) by
fiscal 2007 revenues, comparing favorably to the 2.7x coverage in fiscal
2002.
The 'BBB+' rating on the city's 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.
The city's April 2008 unemployment rate climbed to 7.0% after four
consecutive years of incremental declines. 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 include the recent
completion of the new Comcast headquarters and the addition of 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.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
this site.
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