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.
“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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