Fitch Rates PICA's $363MM Special Tax Rev Rfdg Bonds 'AA'; Outlook Stable.

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the Pennsylvania Intergovernmental Cooperation Authority's (PICA) approximately $362.9 million special tax revenue refunding bonds (City of Philadelphia Funding Program), series 2009. The bonds are scheduled for negotiated sale on June 15, 2009. At this time, Fitch upgrades PICA's $572 million outstanding special tax revenue bonds rating to 'AA' from 'A+'. The Rating Outlook is Stable.

The upgrade to 'AA' on PICA's bonds is based on consistently strong debt service expected to remain at or close to current levels, at least, as well as the expected enhancement of already strong legal protections. Fitch believes debt service coverage levels should remain consistently strong going forward given the statutory limitation on new debt issuance by PICA coupled with a declining debt service schedule until all outstanding debt matures in 2023. In addition to essentially insulating pledged revenue from the City of Philadelphia (the city) and the Commonwealth of Pennsylvania (the Commonwealth), legal protections now include a significantly stronger additional bonds test requirement of 3.0 times (x) compared to the prior 1.75x test.

PICA was created in 1991 to assist the city in its financial recovery. PICA has broad powers to review and approve city budgets and multi-year financial plans and can certify noncompliance to the state, which would result in withholding of certain state aid. PICA was given statutory authority to issue wage tax secured bonds to fund the operating deficits and capital expenditures of the city. At this time PICA has exhausted its borrowing authorization; any additional issuance not for refunding purposes would require board consent and legislative approval by the Commonwealth. PICA reports that it has no plans to seek additional authorization.

The special tax revenue bonds are secured by a 1.5% tax on the salaries, wages, commissions and other compensation earned by residents of the city and on net profits earned in business, professions and other activities conducted by residents of the city. The 1.5% tax is exclusively for the use of PICA and the city and Commonwealth have covenanted not to reduce the tax so long as PICA bonds are outstanding. The city acts as collector of the authority tax in an agency capacity under an intergovernmental agreement with the state revenue department. At all times, the tax revenues remain the property of PICA. After payment of debt service and any subordinate payments, residual revenues flow to the city. Authority tax revenue has increased by an average of 3.7% annually since 2002, due in large part to growth in wages and improved tax collections over that time period. Coverage of maximum debt service (MADS), which occurs in 2010, was strong at 4.6x using fiscal 2008 revenues, comparing favorably to the 2.7x coverage in fiscal 2002.

Fitch currently rates the city's general obligation debt based upon its stable employment base, anchored by its role as a regional economic center and a strong higher education and health care sectors, with limited financial flexibility, exceptionally high debt levels, a significantly under-funded pension position, a rapidly growing fixed-cost burden related to employee benefits, and below-average economic indicators.

Philadelphia, with an estimated population of 1.5 million residents, benefits from its role as a regional economic center and a stable employment base weighted in the education and health care sectors led by the University of Pennsylvania and Jefferson Health System as the largest private employers. Despite a slowing economy, commercial and retail development projects have continued, including the transitioning of the city's naval yard into a large private sector business park consisting of approximately 80 companies. In addition, Children's Hospital of Philadelphia, the Fox Chase Cancer Center, and the University of Pennsylvania are each making a significant capital investment to expand their respective research facilities. However, despite the size and stability of its employment anchors, the city's unemployment rate, like national trends, has experienced a notable increase over the past year, growing to an above-average 9.7% in March 2009 from a more moderate 6.6% one year prior. Income levels are also weak; approximately one-fourth of the city's residents live at or below the poverty rate according to the U.S. Census Bureau.

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