Pennsylvania will issue $950 million of general obligation bonds this week, but it will do so a day later than originally expected.
The competitive bond sale was originally scheduled for Tuesday, but the state pushed back the sale a day to avoid coming to the market at the same time as an $800 million competitive Illinois deal, according to Jim Belonus, analyst at the Pennsylvania budget office. The bonds mature serially from 2014 through 2033, and are callable at par in 2024.
McNees Wallace & Nurick of Harrisburg, Pa., is bond counsel. Public Financial Management Inc. is financial advisor. The bonds are rated AA-plus with a negative outlook by Fitch Ratings, Aa2 by Moody’s Investors Service, and AA with a negative outlook by Standard & Poor’s. Proceeds will be used for three major uses. First, $40 million will be used for maintenance and protection of the environment and farmland preservation. Second, $110 million will be used for loans or grants to improve or repair the state’s water and wastewater system. Third, $800 million will be used for the construction, acquisition or rehabilitation of capital facilities.
The largest pieces of the funding are the $345 million to be used by the Department of Community and Economic Development to fund redevelopment projects, the $295 million to be used by the Department of Transportation for projects, and the $120 million to be used by the Department of General Services for the construction and rehabilitation of state buildings.
The bonds are being sold now because of the cash-flow needs of the programs for which they are to provide money, Belonus said.
The bonds should be well-received by the market, according to Municipal Market Advisors managing director Matt Fabian.
In explaining its Aa2 rating of the state, for strengths Moody’s pointed to the state’s diverse and fairly stable economy.
The analysts also noted Pennsylvania’s improved governance that has resulted in two consecutive timely budgets, reduced reliance on non-recurring revenue sources, and a demonstrated willingness to address revenue shortfalls early in fiscal years.
Finally, Moody’s cited the state government’s strong authority to cut appropriations in mid-year, if necessary. As for challenges, Moody’s said the state’s financial position and liquidity is historically weak. It also pointed to the states’ underfunding of its pension plans and has a high combined debt position when unfunded pension and other post-employment benefits liabilities are included.
Finally, pension funding requirements are expected to expand rapidly in coming years.
To explain its AA rating with a negative outlook, S&P noted some of the same factors as Moody’s. It also noted the state has a moderate debt profile and wealth levels at 102% of the nation in 2010.
Year-over-year growth in employment in September 2012 was 0.7%, slightly more than half the U.S. rate. S&P expects state employment growth to continue to lag.
Fitch noted the same factors as the other rating agencies. Using Fitch’s discount rate assumption, the state’s State Employees’ Retirement System and its Public Employees’ Retirement Systems have funded ratios of 65% and 66%, respectively.
The net tax-supported debt and adjusted unfunded pension obligations are together 9% of 2012 personal income, above the U.S. median for Fitch-rated states.
