Downgrades to Pennsylvania communities will outpace upgrades over 12 to 18 months as local governments face credit pressure amid a weak recovery, Moody’s Investors Service said in a special report.
Most will retain their current ratings, said Moody’s. The agency maintains underlying ratings on 428 local governments in the Keystone State, as well as 240 enhanced ratings on school districts that it bases on three state intercept programs, with a total of $72.7 billion in debt outstanding.
Moody’s, in a report similar in scope to a commentary it issued for Rhode Island communities last December, cited “several pockets of severe stress” in Pennsylvania, notably capital Harrisburg, which is under receivership and is saddled with more than $320 million of bond debt due to financing overruns to an incinerator retrofit project. The city guaranteed the debt with its general obligation.
Capital markets have essentially shut off Scranton after it allowed the parking authority to default on a $1 million bond payment in June. For two weeks in July, the cash-strapped city paid workers minimum wage. The Scranton Parking Authority is now under receivership.
“Poor management decisions and high debt burdens” have worsened problems in Harrisburg, Scranton and others among 27 communities that the state Department of Community and Economic Development has labeled distressed.
Harrisburg and Scranton have been noted for in-fighting. Harrisburg’s City Council three times, all by 4 to 3 votes, rejected a DCED-supported financial recovery plan last year, triggering readership. In addition, the council filed a bankruptcy petition over the objection of Mayor Linda Thompson. A federal bankruptcy court invalidated the filing.
Scranton Mayor Chris Doherty and a majority of council members are continually at odds. The city needs a short-term loan of up to $20 million to help fund operations for the rest of the year. Despite the crisis mode, the City Council could not meet Thursday night because it lacked a quorum.
School districts, according to Moody’s, face the most revenue pressure of all Pennsylvania municipal sectors given their high dependence on state aid and a property tax limit. State aid, which accounts for 30% of school district revenue in Pennsylvania, fell by an average of 5% in fiscal 2012. High fixed costs and state-mandated programs have aggravated the problem, Moody’s added.
The state’s intervention program, known commonly as Act 47 after the 1987 enabling legislation, has produced mixed results, according to the report, which said the Harrisburg and Scranton defaults highlight the weaknesses of the program.
“Recovery plans are subject to implementation risk. Officials may fail to effectively implement a plan due to weak management or departmental resistance,” Moody’s said in the report, released late Thursday. New revenue through Act 47 is limited, it added.
Analyst Michael D’Darcy wrote the report, with assistance from vice president Geordie Thompson and managing director Naomi Richman.
Moody’s rates Pennsylvania Aa2. Fitch Ratings rates Pennsylvania AA-plus, while Standard & Poor’s assigns its AA rating.
