Friday, December 26, 2014

Philadelphia's bond rating lowered by Moody's

Moody's Investors Service announced today that the company has downgraded Philadelphia's bond rating, making it more difficult for the cash-strapped city to borrow money in the immediate future. Moody's cited the “continued weakness of the city's finances” as a rationale downgrading Philadelphia's rating from A1 to A2. Moody's also criticized the city's five-year financial plan.

Philadelphia's bond rating lowered by Moody's

Moody's Investors Service announced today that the company has downgraded Philadelphia's bond rating, making it more difficult for the cash-strapped city to borrow money in the immediate future. Moody's cited the “continued weakness of the city's finances” as a rationale downgrading Philadelphia's rating from A1 to A2. Moody's also criticized the city's five-year financial plan.

“Throughout the plan, financial flexibility remains relatively weak, providing little cushion for contingencies,” wrote analysts in a statement released by the company. “Moody's believes that growth in the local economy will remain weak, affecting wage tax collections and the potential for mid-year cuts in aid from the Commonwealth of Pennsylvania.”

The Nutter Administration did not immediately respond to a request for comment.

According to Amy Resnick, editor of the publication Bond Buyer and an expert on municipal finance, this could have financial implications for Philadelphia.

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“It means that it may cost them a little more money when they go to borrow,” said Resnick. “Like a person, a government that has less good credit is going to have to pay more in interest costs when they borrow money. Moody's is saying that it's a little bit riskier to lend Philadelphia money.”

Moody's provides research and analysis to investors who are considering lending money to government entities or large companies. The company uses a ranking system -- also known as bond ratings -- to gauge the credit-worthiness of various institutions.

Cities with higher bond ratings are generally thought to be more likely to pay back lenders, allowing them to secure better deals on borrowing. For example, a city with a high bond rating is more likely to get a lower interest rate from a bank or other financial institution.

This isn't great news, but it's not time to panic. Philadelphia will still be able to borrow money, including the $106 million for capital spending authorized by voters on Election Day. However, Moody's decision to lower the bond rating is a reminder that Philadelphia's fiscal situation remains rocky.

UPDATE: We just heard from Rebecca Rhynhart, the city's budget director. Here is what she had to say: "We think the timing is somewhat odd, in terms of the downgrade. We think we've turned a corner. Our revenues appear to be stabilizing after two years. There are still challenges ahead, however, we do think we're in a better position than we were a year or two ago." 

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Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.

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