Pittsburgh's credit rating sinks to new low as worst in country

The new rating could push city bonds to below junk bond status.
PITTSBURGH (AP) -- Pittsburgh's credit rating was downgraded to speculative Friday by Moody's Investors Service, a new low for the city and the worst credit rating for any major city in the country, according to analysts.
The city's financial health is in danger because of delays in the approval of proposals by a state-appointed fiscal oversight board, Moody's said.
In addition to lowering the bond rating from noninvestment grade, Moody's placed the city on a watch list for further downgrades. Without intervention, the city will be out of cash in December.
State lawmakers will not meet again until mid-November, when they are expected to vote on what taxes the city will be allowed to raise on residents and those who commute to Pittsburgh for work.
"Should one or more of the local providers deny credit support to the city in January, there will be little recourse for the city to meet expenditure obligations," Moody's analyst Geordie Thompson wrote in a report explaining the downgrade.
Affects debt
The downgrade affects the city's $832 million in previously issued debt.
Municipal financing analysts say the new rating could push city bonds even below junk bond status.
"It's going to do one of two things ... either it means the city will have to pay an extraordinary premium if they want to borrow money and if someone were crazy enough to lend to them in the capital markets," said Michael Pagano, professor of public administration at the University of Illinois-Chicago.
"It also means that Pennsylvania may have to create a mechanism to cover infrastructure costs so that money can be raised through the good graces of the state," he said. "A rating like this could push those existing bonds right out of the bond market."
Distressed community
The announcement by Moody's came one day after the head of the state-appointed fiscal oversight board urged the City Council to act quickly in adopting the board's proposals. Pittsburgh was declared a distressed community by the state late last year, a program intended as a hedge against full-blown bankruptcy.
City leaders have been reluctant to pass a budget based on the proposals of the oversight board, which call for substantial increases in employee and payroll taxes, because the Legislature has yet to approve them.
"Our mayor has been criticized for two previous budgets that were based on phantom revenue because he assumed the state would approve a liquor tax to raise revenue, which it did not," said Councilman Doug Shields. "But investment agencies that look at cities like cuts and new revenues. We just can't do anything until we know what those new revenues are."
Several state lawmakers have said they believe the new revenue streams will not be passed as they appear in the proposal, Shields said.
The uncertainty over the taxes also played a part in the downgrade, Moody's said.
"The debt that is already out there on the secondary market, I don't think anybody is going to touch that," said John Krause Jr., director at ARD Government Finance Group, an independent financial advisory and research consulting group in Arlington, Va. "They would not be able to sell any additional debt either. Most other major cities that are under control boards are moving in the opposite direction."
Krause and Pagano said Pittsburgh's credit rating is the worst of any major U.S. city.
No immediate impact
City officials point out that under the law, Pittsburgh cannot currently borrow money, so there is no immediate impact on the city's ability to secure external financing.
The board's plan outlines an annual $145 tax for anyone who works in the city. It also would bump up payroll taxes for financial and manufacturing interests that have headquarters in the city but employ much of their work force elsewhere.
If the new taxes are not approved by lawmakers, city residents could see substantial increases in wage and property taxes, which city leaders say could lead to an exodus from Pittsburgh.
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