Philly pension bond rating cut; city says borrowing costs steady

Moody's Investors Service said Friday it is cutting its rating on $958 million in Philadelphia Retirement System pension bonds, issued by the Philadelphia Authority for Industrial Development back  in 1999, and on $300 million in taxable City Service Agreement refunding bonds from 2012.

Both bonds were dropped to A3, from A2.  Generally, the lower a borrower is rated, the more it can expect to have to pay investors when it sells new debt.

But Moody's said the city's General Obligation rating, and ratings on city agency debt, remains at A2. It's still considering a possible future downgrade, as the agency announced several weeks ago. The agency's decision not to downgrade G.O. debt at this time was a relief to city officials, said city finance director Rob DuBow.

He noted the downgrade "was part of a nationwide review by Moody's of debt issued by (municipal) authorities," which don't always have the strong payback guarantees that bonds backed directly by city tax revenues give investors. "The big thing for us was to not have (General Obligation and other) bond ratings changed," DuBow added, ensuring city borrowing costs remain lower.

The pension bond was sold to investors in 1999 in an attempt to finance new, profitable investments that would reduce the city's long-running gap between pension assets and retirement obligations.

But many of the ensuing investments by the Board of City Pensions in venture-capital funds and dot.com stocks evaporated in the stock market decline of the early 2000s, leaving city taxpayers with the debt and a larger pension deficit.

Given the $5 billion gap between Philadelphia pension assets and future retirement obligations, Moody's has started considering what will likely happen to the city's bondholders if it is forced to declare Chapter 9 municipal bankruptcy, as Detroit and several California cities that couldn't properly fund their growing pension obligations have done in recent years.

In those cases, police and other unions seeking to preserve full pensions have squared off in court against bond investors trying to get their money back with interest, leaving federal bankruptcy court judges to figure out settlements that pay at least part of what everyone has been promised -- and that taxpayers can afford.

"Philadelphia does not have the ability to declare bankruptcy until fiscal 2023 when its Pennsylvania Intergovernmental Cooperation Authority (PICA) bonds mature," Moody's noted. Even then, the state's governor would have to sign off on a bankruptcy plan.