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PhillyDeals: Standard & Poor's weighing a ratings upgrade for Philadelphia

The public schools are violent. The state is cutting aid. Center City offices are going vacant. But things are looking up for Philadelphia's finances, Wall Street says.

Projects such as stadium construction have left Philadelphia with a mountain of debt. Above, the city's stadium complex in 2003.
Projects such as stadium construction have left Philadelphia with a mountain of debt. Above, the city's stadium complex in 2003.Read moreGEORGE WIDMAN / Associated Press

The public schools are violent. The state is cutting aid. Center City offices are going vacant.

But things are looking up for Philadelphia's finances, Wall Street says.

Standard & Poor's, which rates bonds and other debt so investors have a clue to how much risk they are taking, says it is thinking about boosting Philadelphia's credit rating, a move that could trim millions from the annual cost of paying the city's bills.

Why? Because, for all the city's troubles, Mayor Nutter runs "a proactive administration that has taken action to rebalance operations during a difficult recession," S&P analyst Karl Jacob wrote in a report Monday.

"We could consider an upgrade" from Philadelphia's triple-B bond rating to BBB+ or better over the next two years, Jacob wrote.

"That would help," says Philadelphia Finance Director Rob Dubow, who is making plans to borrow and refinance $270 million in city debt this spring.

Things that anger Philadelphia taxpayers and city workers - "staff cutbacks, a hiring freeze," facility closings, a sales-tax hike, a delay in planned wage- and business-tax cuts - only prove, S&P says, that the city is serious about living within its means.

The state's fiscal oversight board helps keep Nutter's budgets in line, and the city's increasing dependence on hospitals, colleges, and other recession-resistant sectors, after losing its banks and factories, "position [Philadelphia] for growth as the recovery ensues," Jacob wrote, looking on the bright side.

Jacob admits Philadelphia faces a mountain of debt from Nutter's predecessors: While property values are low, "debt levels have increased considerably in the past 12-15 years." Blamed are projects such as former Mayor Ed Rendell's ill-timed billion-dollar pension bond issue, former Mayor John F. Street's inner-city demolition programs, and the hulking stadiums that have enriched the already wealthy owners of the Phillies and Eagles, all funded with taxpayer borrowings.

But Nutter has pledged only "modest" future debt. And S&P believes him enough to hold out the possibility that, for the city's routine borrowing, investors will charge a little less, someday soon.

Going private

The city's beleaguered pension system, which has nearly $4 billion on hand to pay nearly $8 billion in future pension costs, also has a little room to cheer.

The stock market's recovery last year helped boost Philadelphia's pension "funded" ratio - what it owes, compared with what it owns - to 47 percent, from just 45 percent a year ago.

Even under rosy assumptions of 8.15 percent annual investment returns and low future wage hikes, it will take decades, and hundreds of millions of dollars in yearly payments, for the city to reach its goal of 100 percent funding.

Still, the pension board's fiduciary consultant, Cheiron, of McLean, Va., says the underfunded pension plans are a little less of a burden on the taxpaying public than they were a year ago.

It's not just that the city got state permission to delay hundreds of millions of dollars in overdue pension payments.

It also helps, a little, that the city got newly hired police and firefighters to pay 6 percent of their wages into the fund, instead of their older colleagues' 5 percent. The alternative, a new 401(k)-style "worker beware" plan, isn't attracting police, though Philadelphia Housing Authority union workers have agreed to such a plan to replace their underfunded pensions.

DuBow hopes the city's other unions will agree to pay more out of pocket and, eventually, to "a much lower level of guaranteed benefits."

"I'm happy we are going in the right direction [without] a wide range of layoffs and elimination of collective bargaining," said Francis X. Bielli, executive director of the city pension board.

Where's the city investing as it tries to further recoup its fortunes? Not in U.S. stocks or bonds.

"You'll see a move involving commodities, increased private equity, real estate, hedge funds, and master limited partnerships," said Bielli. High-fee stuff, supporting the money-management industry (including Philadelphia outfits as well as Wall Street firms), in hopes it will all pay off someday.