May 28--If the Federal Reserve raises interest rates later this year as expected, Philadelphia says its finances are braced for the fiscal fallout.
The city owes $3.3 billion on its general-obligation and service-agreement debt, says Rasheia Johnson, the former Siebert Brandford Shank & Co. investment banker appointed city treasurer this year under Mayor Kenney.
Of that total, just $219 million, or less than 7 percent, is floating-rate debt that will become more expensive as interest rates rise.
"The rating agencies like to see that under 25 percent," Johnson said. "We definitely try to take the most conservative approach, understanding there could be two rate hikes this year."
The rest of Philadelphia city borrowings are locked in as fixed-rate debt. But higher rates eventually will cost taxpayers more as old bonds are paid down and new debt has to be sold at more expensive interest rates. (Philadelphia schools, the airport, and other agencies borrow independently of the city government.)
Moody's Investors Service still cut one of Philadelphia's credit ratings a notch this week, downgrading a $100 million short-term variable-rate bond issue to Aa2, from Aa1.
In a report, analyst Josephine Castro blamed not the city's relatively weak fiscal or economic outlook, but its switch from BNY Mellon to Barclays as the bank backer for a line of credit designed to keep payments flowing.
Moody's lower A2 rating on the city's solo borrowings remained unchanged.
BNY Mellon had backed the variable-rate bonds since 2013 but declined to renew, effective in June.
"They did not say why. Just 'a business decision,' " treasurer Johnson told me. BNY Mellon spokesman Ron Sommer declined to comment.
Of the other Wall Street banks, "Barclays came back with the strongest proposal" to replace BNY Mellon, Johnson said.
But Moody's considers Barclays, in combination with Philly, a bit less bankable than BNY Mellon, thus the rating cut. Johnson said the new rating isn't likely to cost the city, since these bonds are already on the market.
Credit is one of those strange industries where the less a customer can afford the product, the more it costs.
Low ratings typically are more expensive for longer-term debt. Philadelphia's A2 rating has forced taxpayers to pay up to 0.81 percent extra on recent issues, compared with AAA-rated borrowers such as Chester County.
Put another way, Philadelphia taxpayers will spend up to $27 million a year extra this year to borrow money because of its less-than-perfect credit rating.
Moody's discounts Philadelphia's credit because of its chronic long-term slow job growth, poverty, and underfunded pensions. It would have to fix its fiscal challenges before bond investors grant the city cheaper financing.
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