2008-10-17 04:00:01 -
- Fitch Ratings assigns an 'A+' rating to the School District of Philadelphia, Pennsylvania's (the district) approximately $284.4 million general obligation (GO) bonds, series E of 2008 and $112.7 million GO refunding bonds, series F of 2008 based on the Pennsylvania school bond enhancement program. The bonds are scheduled for negotiated sale on October 28. Proceeds from the series E
bonds will be used to fund various capital projects, and the series F bonds will prepay an outstanding loan made to the district by the Dauphin County General Authority. At this time, Fitch also assigns an underlying 'BBB-' rating to the bonds now offered. In addition, Fitch affirms the enhanced 'A+' and underlying 'BBB-' ratings on the school district's outstanding $2.9 billion in GO bonds. The enhanced Rating Outlook is Stable; the underlying Rating Outlook has been revised to Stable from Negative.
The 'A+' rating is based on state law, which requires the withholding of state appropriations and their direct payment to bondholders or their paying agents in the event of a failure by the district to make debt service or sinking fund payments as scheduled. Strengthening the structure is the district's covenant to make daily sinking fund payments from local revenues for all fixed-rate GO bonds.
The underlying 'BBB-' rating reflects the district's credit quality without consideration of the protections afforded bondholders from the school bond enhancement program. Credit characteristics include the district's consistently weak financial condition and exceptionally high debt levels. The Outlook revision to Stable from Negative reflects the increased recurring financial support from the city and the state that began in the latter part of fiscal 2008 and is fully incorporated into the fiscal 2009 adopted operating budget. Fitch expects the added financial support to aid the district in achieving balanced operations going forward.
Fitch downgraded the underlying rating to 'BBB-' from 'BBB' in 2006 following the deterioration of the district's financial condition. Prior to the current revision in Rating Outlook, the underlying rating had been on either a Negative Outlook or Negative Watch since 2006, reflecting Fitch's ongoing concern that the district would not be able to recover from a large operating deficit in 2006 and sustain balanced operations going forward. Fiscal 2008 ended almost as expected, with a small operating deficit, but the adopted fiscal 2009 operating budget now projects positive operating results in contrast to the modest budgeted deficit included in the 2009 preliminary budget. The improvement is primarily attributable to a favorable 7% increase in state funding and a solid 4% increase in property tax revenue. Concern remains, however, over ongoing contract negotiations with the district's teachers' union and the ability to absorb any increases in salary beyond the current salary structure that is in place through the third quarter of the current fiscal year. Fitch is also concerned about the district's limited revenue-raising flexibility, and believes that the source of any revenue enhancements would have to be derived from either the city or the state, both of whom will have their own budget constraints.
Fiscal 2006 ended with an unanticipated operating deficit of $108.3 million, which led to a unreserved fund balance deficit across all operating funds of negative 4.4% of spending despite the issuance of deficit financing bonds that bolstered liquidity and reserve levels in fiscal 2002. The district's financial performance improved in fiscal year 2007 with a return to positive operations following the implementation of several cost-cutting measures, including personnel reductions and utilization of additional non-recurring revenues. The district significantly reduced a large operating budget gap for fiscal 2008, and unaudited year-end results show an operating deficit of approximately $29 million, largely the result of an unforeseen rise in charter school enrollment as well an unanticipated increases in debt service and fuel costs.
Additional credit concerns include the district's high debt levels and significant capital needs. The overall debt burden remains extremely high, exceeding $5,000 per capita and 20.0% of market value. The 2008-2014 capital improvement plan (CIP) is estimated at slightly more than $2.0 billion with almost three-quarters expected to be supported by debt issuance.
Despite a long trend of annual enrollment declines, the district remains one of the largest urban school districts in the U.S. with a 2008-2009 enrollment of 164,848. The city's unemployment rate, which continues to exceed the state and the nation, climbed to 8.0% in August 2008 from 6.1% in August 2007, although all of the increase can be attributed to labor force growth. Economic indicators remain below average as approximately one-fourth of the city's residents live at or below the poverty line according to the U.S. Census Bureau.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
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.
Fitch Ratings, New York
Christopher Hessenthaler, +1-212-908-0773
Ann Flynn, +1-212-908-9152
Cindy Stoller, +1-212-908-0526 (Media Relations)
