Fitch Rts School District of Philadelphia GOs 'BBB' Und.

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 16, 2004

Fitch Ratings assigns a 'BBB' underlying rating to the School District of Philadelphia, PA's $1.5 billion of outstanding general obligation bonds.

The rating reflects the district's general obligation credit quality without consideration of the added protections afforded bondholders from a state aid intercept authorized by Section 633 of the Pennsylvania School Code, as amended by Act 154 of 1998, or of any municipal bond insurance policy. Fitch already maintains an enhanced 'A+' rating on the debt based on the intercept and 'AAA' ratings on certain outstanding insured bonds. The Rating Outlook is Stable, indicating currently expected trends in the rating over the next one to two years.

Fitch bases its investment grade rating on strong oversight by the commonwealth-controlled School Reform Commission (SRC); the appointment of a highly experienced leadership team to facilitate financial and academic reforms; and management's early progress toward achieving fiscal stability, implementing a comprehensive capital program, and improving the learning environment and educational outcomes.

Fitch sees that clearly defined challenges remain, including the district's limited revenue raising capacity, wage and benefit cost pressures, a debt burden that will rise significantly as deferred capital needs are met. Additionally, a tepid local economy that may restrain incremental revenue growth. Of equal concern is the need for prompt, measurable improvement in student achievement. Fitch believes that continued community and stakeholder support, as well as additional state and federal resources, will be at least partially predicated on the perception that reforms are making progress.

Since taking office in July 2002, the district's management team has developed an aggressive, multi-track plan to streamline administrative functions and contain costs while making strategic investments in staff development, accountability measurement, school infrastructure, new curriculum materials, and academic support. A five-year financial plan identifies annual revenue enhancements and spending reductions that gradually reduce structural budgetary imbalance. Weighted somewhat toward spending reductions that are within the district's control, the plan has already been extended one year to fiscal 2008, and results for the first year, fiscal 2003, indicate that nearly all planned savings targets were realized. Although the plan calls for the use of nearly all surplus proceeds of the district's May 2002 deficit bond financing, Fitch believes that embedded assumptions are conservative and that operating results are quite likely to better the forecast.

The district's capital program through fiscal 2009 totals $1.82 billion, of which nearly $700 million was borrowed in July 2003. Plans call for the elimination of middle schools, to be replaced by neighborhood high schools and expanded and reconfigured K-8th grade schools. The size of the capital plan reflects more than 20 years of deferred investment in school infrastructure, but amounts to only 50% of the projected need. Debt service currently makes up slightly less than 7% of the operating budget, but will grow as approximately $1 billion is issued over the next several years. Direct debt is slightly above-average, but overall debt ratios, which include obligations of the coterminous City of Philadelphia, are among the highest in the urban U.S.

The 'BBB' underlying rating also applies to $588.1 million of outstanding State Public School Building Authority school lease revenue bonds (The School District of Philadelphia Project), series of 2003. The district's obligation to make lease rental payments is a full faith, general obligation.

For additional information on the School District of Philadelphia, please see Fitch Ratings' forthcoming report on the district.