Fitch Rates Pittsburgh, PA's GOs 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the city of Pittsburgh, PA's approximately $50 million series of 2010 general obligation (GO) bonds. The bonds are expected to sell via negotiated sale on or about Dec. 1, 2010.

In addition, Fitch has affirmed the city's $632 million outstanding GO bonds at 'A'.

The Rating Outlook is Stable.

RATING RATIONALE:

---The city's financial position remains stable as reflected in multiple years of adequate reserves levels as a result of management's ability to control expenditures.

--The city benefits from a broadened tax base, including a strong presence of health and higher education institutions, which continues to experience commercial development.

--The city's debt burden is above average to high; additionally, pension liabilities are large and continue to increase as a result of significant underfunding.

--Income and wealth levels are weak, but unemployment rates are below the state and national averages.

KEY RATING DRIVERS:

-Maintenance of stable financial position;

-Management's development of a realistic plan to address and control the large unfunded accrued actuarial liability (UAAL);

--Ability to manage high debt burden in light of capital needs;

--Continued economic stability.

SECURITY:

The GO bonds are secured by the full faith credit and taxing power of the city, payable from its tax and other general revenues.

CREDIT SUMMARY:

Since December 2003, Pittsburgh, the second largest city in the Commonwealth of Pennsylvania, has operated as a 'distressed municipality' under the Municipalities Financial Recovery Act (Act 47). In February of 2004, the state created additional City fiscal oversight authority under the Intergovernmental Cooperation Authority Act for Cities of the Seconds Class (Act 11). Like many older urban areas, Pittsburgh's economy has been challenged for decades by the erosion of the manufacturing sector and a steady decline in population. The strong presence of education, health care and financial services have continued to contribute to the long-term stability of the economy, offsetting the loss of manufacturing sector jobs. The city is home to the University of Pittsburgh Medical Center (UPMC), one of the region's largest medical facilities, and West Penn Allegheny Health System, as well as the University of Pittsburgh. Federal, state and county governments are three of the city's top 10 employers. As of August 2010, unemployment was 8.7%, below that of the state and nation at 8.9% and 9.5%, respectively. Population declines had somewhat abated until 2009 but are expected to stabilize. The city has benefited from significant growth in its tax base as a result of development of its downtown area.

The city's financial position has remained stable as reflected in its adequate reserve levels. Offsetting the stable financial position, Fitch notes that the city's pension funding level is extremely weak at 27% as of Dec. 31, 2009 despite the issuance of pension obligation bonds in 1998. As required by the Commonwealth's enacted pension legislation (Act 44), the city must restore funding to at least 50% by Jan. 1, 2011 to avoid a state takeover of its pension system. The takeover could result in potentially higher annual pension payments from its current annual payments of $56 million in 2010. In the event the funding level is not restored to at least 50%, the city's pension plans will be merged into the Pennsylvania Municipal Retirement System (PMRS) in accordance with the provisions of Act 44. The city is currently evaluating its options to meet the 50% threshold, which have included a long-term lease of its parking facilities or the sale of its parking facilities to the city parking authority. To date, none of the options have been approved by city council or the city parking authority.

The city benefits from a diverse revenue stream of property taxes, federal and state funds as well as non-property taxes including earned income taxes, local service taxes, payroll preparation taxes and other smaller fees. In 2010, the city has been able to reduce expenditures to meet declines in several of its revenue sources. Collections of prior year tax payments have not met budgeted expectations and state aid revenues have declined. As of the second quarter, the city expects to end fiscal year 2010 with balanced operations. The city ended fiscal 2009 with a surplus of about $9.4 million resulting in an unreserved fund balance of $55.5 million, or a strong 12.8% of total 2009 expenditures and transfers, up from $46.5 million or 9.4% in fiscal 2008. The 2011 proposed budget assumes a state takeover of the city's pension plans and increased contributions. Revenue assumptions are in line with the prior year budget and include a slight decline in property taxes (totaling 27% of total revenues), a small increase in earned income taxes (equals 15% of total revenues) with other sources remaining virtually flat. Federal and state grants are expected to decline slightly.

The city's overall debt burden, including the school district and county, is above average to high at $4,756 per capita and a high 7% of market value. Ongoing debt management is a priority of the city as it works to reduce overall debt levels. The city expects to use $45 million of available funds in its debt retirement fund to defease outstanding debt by year end. The city prudently uses pay-as-you-go funding to meet its capital needs. Market value per capita is weak at $68,000. Fitch notes that the city currently uses 2002 as its base valuation year due to ongoing litigation. The PA Supreme Court determined that the base year system used was unconstitutional and has ordered Allegheny County to undertake a reassessment. The county has submitted a plan that will have the reassessment and certification of new values completed by January 2012 and as per state statute, the increase is limited to 105% of the prior year real estate tax collection, net of new construction. The city's other post employment benefits (OPEB) unfunded liability is $359 million with an annual required contribution (ARC) of $29.5 million. The city continues to fund on a pay-as-you-go basis in the amount of $20 million, far less than the ARC.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, LoanPerformance, Inc., IHS Global Insight, and the Underwriter

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', dated Aug. 16, 2010.

'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.