New Issue: Moody's revises Pittsburgh PA's outlook to positive; affirms A1

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1 New Issue: Moody's revises Pittsburgh PA's outlook to positive; affirms A1 Global Credit Research - 07 Aug 2014 Assigns A1 to $50M Ser GO bonds; city has $580M GO debt outstanding PITTSBURGH (CITY OF) PA Cities (including Towns, Villages and Townships) PA Moody's Rating ISSUE RATING General Obligation Bonds, Series of 2014 A1 Sale Amount $50,000,000 Expected Sale Date 08/15/14 Rating Description General Obligation Moody's Outlook POS Opinion NEW YORK, August 07, Moody's Investors Service has assigned an A1 rating to the City of Pittsburgh, PA's $50 million General Obligation Bonds, Series We have affirmed the A1 rating on approximately $530 million of outstanding general obligation debt. At this time, we have also revised the city's outlook to positive from stable. Proceeds of the 2014 bonds will be used to fund part of the city's capital improvement program, including work on bridges, roads, urban redevelopment, and parks. The bonds are secured by the city's General Obligation unlimited tax pledge. SUMMARY RATING RATIONALE The A1 rating reflects the city's large and diverse tax base, with substantial contributions from universities, hospitals, and government institutions. The rating also incorporates the city's below-average socioeconomic profile, including a high poverty rate and weak resident income levels. Finally, the rating recognizes significant fixed costs from a heavy debt burden, large pension liabilities, and post-retirement health care, as well as sizeable capital needs relating to aging infrastructure. The positive outlook reflects the steps the city has taken to reduce its long-term liabilities. The city's long-term plan seeks to control costs, reduce debt, and increase pension funding, all while maintaining operating stability and a healthy fund balance. As the city makes progress in this plan, its finances are likely to strengthen and its debt burden will decrease. STRENGTHS: Large, diverse tax base with significant institutional presence Sensible long-term plan to reduce pension liabilities and debt CHALLENGES: Large legacy costs including debt service and pension and post-retirement healthcare benefits Below-average socioeconomic profile

2 DETAILED CREDIT DISCUSSION ACT 47 PLAN ADDRESSES LEGACY COSTS WHILE MAINTAINING HEALTHY RESERVES The city's recovery plan is likely to result in a gradual reduction in unfunded long-term liabilities while maintaining healthy reserves. The city entered the Act 47 program for distressed cities in 2003, and will remain in the program until at least The latest 5-year plan, filed this year, utilizes a sharp drop in debt service beginning in 2018 as capacity to increase funding for pension and other post-employment benefits (OPEB) liabilities, as well as invest in the city's aging infrastructure. The long-term projections assume that revenue trends will continue at the current pace, which we consider reasonable. A reversal of the recent economic expansion would depress tax revenues relative to current forecasts and disrupt the city's long-term plan, leading either to lower fund balance or weaker pension, OPEB, and capital funding than initially planned. TAX BASE STRENGTHENING; INSTITUTIONAL PRESENCE PROVIDES STABILITY After many decades of decline, the city's tax base has begun to stabilize. The presence of large healthcare and higher ed institutions, including the University of Pittsburgh Medical Center (rated Aa3 stable), the University of Pittsburgh (rated Aa1 stable), and Carnegie Mellon University, has bolstered employment opportunities and attracted businesses to the city. Other stable employers such as the US government, the Commonwealth of Pennsylvania (rated Aa3 stable), and members of the finance and technology industries help to round out the base. Businesses are attracted to Pittsburgh because of its young, well-educated work force and low labor costs. The median family income of the city's residents as of the 2012 American Community Survey was 82% of the US median, which is below-average, but consistent with other medium-sized, formerly manufacturing cities. Some pockets of the city remain weak. The poverty rate is high at 22.5%, and the median home value of $88,500 is far below the US median of $181,400. After a county-wide revaluation and a large wave of tax appeals, the latest estimate of the city's full value is $17 billion, which equates to a below-average $55,584 per capita. The $17 billion full value does not include the substantial presence of tax-exempt properties, which represent 39% of the base. The city is likely to continue to grow. A number of redevelopment projects are under way, and developers have invested $5 billion in the city since After peaking at almost 700,000 people in 1950, the city's population has finally stabilized at about 300,000. FINANCIAL POSITION HEALTHY; TAX REVENUES INCREASING The city's expansion has bolstered tax revenues and helped lead to a stronger financial position. The city's $480 million budget is funded by a property tax levy (27% of revenues), a 1.25% resident earned income tax (17%), a 0.55% gross payroll tax (12%), and a 37.5% parking tax (11%). With the exception of the property tax levy, most of the city's tax revenues have been climbing during the expansion. The income tax has grown every year for the past decade even during the recession, although the strengthening of collection procedures under Act 32 has likely driven part of this growth. The payroll tax has also grown in the past three years, the result of business expansion. Property tax receipts decreased 7% in 2013 as the city dropped its millage rate for a revaluation by Allegheny County (rated A1 stable). The result of the positive tax trend has been an increasing fund balance. The city finished 2013 with a fund balance of $96 million, or 20% of revenues, up from as low as 10% of revenues in This improvement is net of higher funding for pensions and OPEB. The city's financial trend will remain strong as long as the economy continues to expand. However, the growth in fund balance is unlikely to continue, as the city will probably devote future surpluses to pensions, OPEB, and capital. HEAVY DEBT AND PENSION BURDENS Pittsburgh's debt and pension burdens are heavy. The city's plan will reduce or fund them, but only gradually and over many years.

3 over many years. The city's debt portfolio consists of about $607 million of gross debt including $580 million of direct General Obligation bonds and $24 million property tax-backed tax increment financings. The debt is high at 3.6% of cityestimated full value and 1.26 times revenues. The main driver of the high debt burden is the city's issuance of pension obligation bonds (1/3 of debt burden) in the 1990s, as well as refundings to back-load debt service in the 2000s. The high debt relative to full value also reflects the fact that full value does not include the significant tax exempt portion. The city's debt amortizes quickly with 70% of principal scheduled to be repaid within 10 years. The city administers three pension plans, with an aggregate unfunded liability of more than $1 billion. Under Moody's methodology for adjusting reported pension data, the city's adjusted net pension liability has averaged about 2.6% of full value and 0.9 times revenues over the past three years. The adjustments are not intended to replace the city's reported liability information, but to improve comparability with other rated entities. The city has taken significant steps to improve its pension funding, including devoting $13 million a year of parking revenues to over-fund its required contribution. The city recently reduced its assumed rate of return and extended its mortality assumptions, leading to increased required contributions. The city also has nearly $500 million of OPEB liabilities. Two years ago, the city began to contribute $2.5 million a year to an OPEB trust. Although the funding ratio is still very low, the step is proactive and reflects well on management. WHAT COULD CHANGE THE RATING - UP: Demonstrable progress in the long-term plan to reduce pension liabilities and debt Sustained strengthening of the tax base WHAT COULD CHANGE THE RATING - DOWN Failure to make progress in the plan to reduce pension liabilities and debt Failure to maintain adequate fund balance while executing the long-term plan KEY STATISTICS: Full value: $17 billion Full value per capita: $55,584 Median family income: 82% Fund balance as % of revenues: 19.8% 5-year dollar change in fund balance as % of revenues: +8.87% Cash balance as % of revenues: 16.1% 5-year dollar change in cash balance as % of revenues: 6.8% Institutional framework (PA cities): Aa 5-year average of operating revenues to operating expenditures: 1.00x Debt to full value: 3.57% Debt to revenues: 1.26x Moody's adjusted three-year net pension liability to full value: 2.64% Moody's adjusted three-year net pension liability to operating revenues: 0.93x The principal methodology used in this rating was US Local Government General Obligation Debt published in January Please see the Credit Policy page on for a copy of this methodology. REGULATORY DISCLOSURES

4 For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. Analysts Dan Seymour Lead Analyst Public Finance Group Moody's Investors Service Geordie Thompson Additional Contact Public Finance Group Moody's Investors Service Contacts Journalists: (212) Research Clients: (212) Moody's Investors Service, Inc. 250 Greenwich Street New York, NY USA 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY'S ("MOODY'S PUBLICATION") MAY INCLUDE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS,

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