Pennsylvania Outlook Cut to Negative by Moody’s on Stalemate

  • Outlook change affects $10.9 billion in general obligations
  • Budget dispute over tax increases, state pension funding

The outlook on Pennsylvania’s credit rating was dropped to negative from stable by Moody’s Investors Service, which cited a budget stalemate that has lasted for more than 100 days and led investors to demand higher yields to hold the state’s bonds.

The outlook revision affects $10.9 billion of state general obligations, which Moody’s rates Aa3, three steps below its top rating of Aaa. A downgrade would leave Pennsylvania in sole possession of the third-lowest credit rank among U.S. states, ahead of only Illinois and neighboring New Jersey.

The change “reflects the difficulty the commonwealth is likely to have closing its structural budget gap in light of the contentious political environment,” Moody’s analysts Dan Seymour and Nicholas Samuels wrote in a report released Friday. “Large tax increases in the executive budget proposal that are designed to close the commonwealth’s budget gap have failed to pass, while alternatives enacted by the legislature have been vetoed.”

"If the leadership doesn’t come together, it’s a negative on credit quality," said Alan Schankel, a managing director at Janney Montgomery Scott LLC in Philadelphia. A rating cut could occur if the stalemate persists to January, he said.

Budget Debate

Pennsylvania’s Republican-led legislature and Democratic Governor Tom Wolf have been at loggerheads over proposed tax increases and overhauls to the underfunded public employee pension system. The impasse has already triggered downgrades to some school district bonds.

The state’s 10-year bonds are yielding 0.54 percentage point over top-rated securities, near the 0.61 percentage point reached in July, which was the most since Bloomberg began compiling the data in 2013. Only Illinois and New Jersey, which have even larger pension shortfalls, pay more, according to data on 20 states.

The revision underscores Wolf’s position against one-time revenue measures to balance the budget, said Jeffrey Sheridan, a spokesman. "If we don’t end the over-reliance on gimmicks, we’re going to continue to suffer from credit downgrades," he said.

The outlook should be changed back to stable once a budget is passed, said Jennifer Kocher, a spokeswoman for senate Republicans. "We had a responsible budget" that Wolf had vetoed, she said.

Moody’s cut the state’s credit rating in July 2014 and July 2012. Standard & Poor’s and Fitch Ratings have stable outlooks on Pennsylvania’s ratings, which both companies downgraded last year to AA-.

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