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Moody's sees rare Philadelphia school loan as positive
August 19, 2013 / 4:12 PM / 4 years ago

Moody's sees rare Philadelphia school loan as positive

Aug 19 (Reuters) - An unusual move by Philadelphia to borrow $50 million in the capital markets for a loan to its cash-strapped public school system will help the district’s credit standing, Moody’s Investors Service said on Monday.

Like other big U.S. urban school systems, Philadelphia’s district has lost droves of students to charter schools over the last several years, Moody’s noted in a statement.

Exacerbated by the drop in enrollment, the financial crisis for Philadelphia’s school district prompted Superintendent William Hite to warn that without additional funding, schools might not open on Sept. 9 as scheduled.

The last-minute loan from the city will allow schools to open on time after rehiring about 1,000 laid off teachers, assistant principals, hallway monitors and other staff.

A timely opening will help the district retain students, Moody’s said, because a delay would have forced some parents to scramble to put their children in schools outside the district.

The district has hemorrhaged students. In 2008, just 16 percent of pupils were enrolled in charter schools. But for the 2013-2014 school year, about 62,000 -- or more than a third -- of Philadelphia’s 198,000 students will attend one of 84 charter schools, Moody’s said.

Mayor Michael Nutter’s pledge last Thursday that the city would borrow $50 million to help its schools “is an unusual and significant action,” Moody’s said.

“It is extremely rare for a U.S. local government to borrow to provide financial relief for another local government, even if they are coterminous,” the credit rating agency said.

The borrowing amounts to deficit financing on behalf of a separate municipality that has its own ability to issue bonds, meaning that Philadelphia is taking on the role of parent government.

That is “unprecedented,” Moody’s said, because it is a role usually assumed by more senior levels of government, such as a state.

Adding $50 million to Philadelphia’s $4.4 billion of debt grows that debt by 0.1 percent and adds 4.3 percent to its debt-service costs.

The borrowing will likely be repaid in part by extending a 1 percent hike on sales taxes that was supposed to have been temporary. The four-year repayment period for the loan and level of borrowing “will not materially affect the city’s finances,” Moody’s said.

But a pattern of such support could hurt the city’s standing with Moody’s if it were prolonged, Moody’s said.

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