Market Overview

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

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned the following ratings to the city of Pittsburgh, Pennsylvania's (the city) bonds:

--$47 million general obligation (GO) bonds, series 2011A 'A';

--$48 million GO bonds, series 2011B 'A'

The bonds are expected to sell via negotiation July 26th.

In addition, Fitch affirms the following ratings:

--$631.2 million outstanding GO bonds at 'A' -- a portion of which will be refunded with the current issuance.

The Rating Outlook is Stable.

CREDIT SUMMARY:

The city benefits from a diversifying economy, anchored by healthcare, education and finance. State oversight continues, contributing to the city's maintenance of a structurally balanced financial profile and healthy fund balance levels. However, pension funded ratios are very low with the plans potentially being subject to state take over. Pension funding, whether through increased contributions to the current city plans or to the state if plans were to be merged, may pressure financial operations. Debt levels continue to be high.

KEY RATING DRIVERS

--ECONOMY AIDED BY PRESENCE OF HEALTH CARE, EDUCATION AND FINANCE: The strong presence of health care, education and financial services continue to anchor the city's economy. Economic growth has returned in the past year, lowering the unemployment rate to below state and national averages.

--FINANCIAL PROFILE IS SOUND: The city's financial profile is sound with a moderate use of reserves in fiscal 2010 for one-time capital needs. Financial performance is aided by ongoing proactive state oversight.

--DEBT AND PENSION OBLIGATIONS ARE HIGH: Debt levels are high and debt service accounts for an above average percentage of spending, further constraining financial operations. Additionally, pension obligations are significantly under-funded although the city has adopted a plan, which if approved by the state, will increase the funded ratio to a still low 50%.

WHAT COULD TRIGGER A RATING ACTION

--Pension obligations, whether through increased contributions to the city's current plans or to the state if plans were to be merged, may constrain financial operations.

--An inability to maintain a stable financial position would pressure the rating.

--The city will need to balance its high debt levels with its ongoing capital needs.

SECURITY

The bonds are general obligations of the city and to which the full faith, credit and taxing power of the city are pledged.

CREDIT PROFILE

ECONOMY AIDED BY PRESENCE OF HEALTH CARE, EDUCATION AND FINANCE:

The strong presence of health care, education and financial services anchor the city's economy and have offset the decline of the manufacturing sector, the city's traditional economic base, over the past few decades. The University of Pittsburgh Medical Center (UPMC), the city's top employer, is one of the region's largest medical facilities. The city is also home to the West Allegheny Health System, the University of Pittsburgh and PNC Financial Services. Employment growth has returned in 2011 with 1.2% growth in April from a year prior. The labor force continues to decline moderately with a 0.4% decrease over the same time period while the current 6.6% unemployment rate is lower than that of the state (7.2%) and nation (8.7%). Wealth levels are below average.

The tax base has remained relatively stable despite the city continuing to use fiscal 2002 as its base year for assessments. The PA Supreme Court ruled in April 2009 that the base year method for property valuation as applied by Allegheny County violates the state constitution. A reassessment was ordered and is anticipated to be complete by Jan. 1, 2012. The city expects significant growth from the reassessment which is expected to positively affect the fiscal 2013 budget.

FINANCIAL OPERATIONS REMAIN SOUND-AIDED BY FISCAL OVERSIGHT:

Since December 2003, Pittsburgh has operated as a 'distressed municipality' under the state's Municipalities Financial Recovery Act (Act 47) while the state created additional fiscal oversight of the city under the Intergovernmental Cooperation Authority Act for Cities of the Second Class (Act 11) in 2004. The ICA, which is intended to help the city recover from its financial crisis and bring long-term fiscal health to the city, is granted considerable financial controls including approval of the city's annual budget, multi-year financial plan and collective bargaining agreements.

The city remained structurally balanced in fiscal 2010 with approximately $12.5 million use of reserves, driven by the city's purchase of an ERP financial system. The unreserved fund balance decreased to roughly $42.6 million, equal to a still sound 8.6% of spending. The city is currently projecting a $6.2 million surplus for fiscal 2011, despite having appropriated the use of $12.1 million in the original budget due to conservative budgeting.

DEBT LEVELS REMAIN HIGH ALTHOUGH UPCOMING DEBT CLIFF IS EXPECTED TO EASE PRESSURE IN MEDIUM TERM:

Overall debt levels are high at roughly $4,800 per capita and 6.8% of market value. With the current refunding, fiscal 2011 budgeted debt service totals $52.9 million, equal to 11.8% of spending and increases to $87.4 million for fiscal 2012 (a high 18.7% of current budgeted spending levels). Debt service remains level from fiscal 2012 until the debt cliff begins in fiscal 2018, decreasing over a two year period to $39 million by fiscal 2019, where it remains for the rest of the current amortization period. Amortization is rapid with a little over 75% of principal being retired within ten years.

The city's fiscal 2011 - 2016 CIP totals $281.8 million, which will be partially funded through proceeds and debt service savings from the current issuance. The city has no plans for additional debt for the next three years. Savings from the current refunding will be used to fund pay-go capital needs.

PENSIONS CONTINUE TO POSE RISK:

The city maintains three single-employer defined benefit pension plans for non-uniformed employees, police and fire, respectively. As of the most recent actuarial reports dated January 2009, the plans had a very low aggregate funding level of 34.3%, assuming an 8% investment return. Using Fitch's more conservative 7% discount rate, the funded level would decrease further to 30.9%. The Commonwealth of Pennsylvania has enacted legislation, Act 44, which mandates that the city reach a funding level of at least 50% by Dec. 31, 2010. In the event the city failed to meet the minimum funding requirement, the city's plans would merge with the state's pension system, PMRS.

The ICA approved the city's adopted plan to meet its minimum funding requirement. The plan, which was completed in December 2010, requires the deposit of $45 million of the city's unrestricted debt service balances to be deposited to the comprehensive trust fund. In addition, dedicated parking revenues totaling $13.4 million annually for fiscal 2011 through fiscal 2017 and $26.8 million from fiscal 2018 through fiscal 2041 will be paid to the comprehensive trust fund. Actual pension contributions by the city for fiscal 2010 totaled $101.6 million, equal to a high 20.4% of total general fund spending.

The dedication of parking taxes is irrevocable per city council action and equal roughly 1/3 of total parking taxes budgeted for fiscal 2011. In June 2011, the Pittsburgh Parking Authority increased parking meter rates to produce additional revenues, with the goal of offsetting the dedicated portion of the tax. While the city's current funding plan was approved by the ICA, The Public Employee Retirement Commission (PERC) has not yet determined if the current plan will satisfy the requirements of Act 44 to reach the minimum actuarial funding level. The city expects to receive PERC's decision by fall 2011.

If PERC determines the pension funding plan does not meet requirements of Act 44, it is likely that the city's plans will merge with PMRS. PMRS standards include a lower actuarial return assumption and higher additional funding costs, which would increase the city's annual pension costs, putting additional financial pressure on the city but increasing the pension funded levels. Current estimates by the city's independent actuaries indicate the city's pension contributions may increase by $25 million annually, which may be partially offset by the dedicated parking tax revenues funded through the recent rate increase.

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

In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 16, 2010);

--'U.S. Local Government Tax-Supported Rating Criteria'(Oct. 08, 2010).

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.

Fitch Ratings
Primary Analyst
Rachel Barkley, +1-212-908-0514
Director
Fitch, Inc.
One State Street Plaza
New York, NY
or
Secondary Analyst
James Mann, +1-212-908-9148
Senior Director
or
Committee Chairperson
Adrienne Booker, +1-312-368-5471
Senior Director
or
Cindy Stoller, New York, +1-212-908-0526
cindy.stoller@fitchratings.com

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