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S&P Tells Pennsylvania: Balance Budget or Face Rating Downgrade

  • Budget passed by legislature leaves $2 billion deficit
  • It’s uncertain whether revenue raising steps will follow

Pennsylvania’s bond rating may be downgraded as its finances erode and the state risks enacting a budget that leaves it on track to spend more than it brings in, S&P Global Ratings said. 

S&P placed the Keystone State’s AA- rating on negative watch after it failed to enact a spending plan before the fiscal year began on July 1. The Senate and House have since passed a $32 billion budget that falls $2 billion short in revenue. Governor Tom Wolf, a Democrat, has 10 days to sign, veto or let it become law without his signature. It’s not clear whether legislators will agree on a revenue-boosting package by July 10, S&P said.

“While it is not uncommon for states to have periodic structural imbalance, Pennsylvania’s chronic misalignment and eroding general fund position, particularly during a period of economic growth, demonstrate a pattern of financial mismanagement," S&P said in a statement. “If legislators enact a budget that relies on what we view as optimistic assumptions or one-time sources, we would likely lower the rating."

Credit rating companies are becoming increasingly impatient with U.S. states that run persistent deficits. S&P, Moody’s Investors Service and Fitch Ratings have warned Illinois that it could be downgraded to junk, an unprecedented low for a state, if it fails to enact a budget that shores up its finances. All three rating companies in May downgraded Connecticut after plummeting income-tax collections opened a $5 billion two-year budget deficit. 

S&P warned Pennsylvania even as spreads on its bonds have narrowed. The difference in yield between 10-year Pennsylvania general obligation bonds and top-rated debt of the same maturity have declined to 0.48 percentage point from 0.56 percentage point at the beginning of last week.

Pennsylvania has "repeatedly" had prolonged budget negotiations that failed to result in a balanced budget without relying on one-time revenues or gimmicks. Given the budget gap amounts to 6.3 percent of spending and the commonwealth’s weaker liquidity position as fiscal 2018 begins, deliberations are even more important than in past years, S&P said.

If lawmakers bring the budget into balance within 90 days, S&P may remove the ratings from CreditWatch.

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