Moments after Janney Capital Markets on Tuesday cited "cracks" in the foundation of state credit quality nationwide, Pennsylvania announced it would have to loan money to itself to keep running.
State Treasurer Rob McCord said Pennsylvania must borrow up to $1.5 billion from the treasury's short-term investment pool to replenish the state general fund. According to McCord, the state's main operating account dipped to around negative $20 million Monday morning, the earliest it has been this low in 10 years.
Responding to a request from Gov. Tom Corbett's administration, McCord extended the credit line after consulting with Auditor General Eugene DePasquale. The administration borrowed $700 million against that line of credit on Monday.
"Pennsylvania is now compelled to borrow unusually early in the fiscal year to pay its daily bills," McCord told reporters in Harrisburg.
Moody's Investors Service in July downgraded Pennsylvania to Aa3 from Aa2, citing structural imbalance and unfunded pension liability.
Janney's, in its
"The message, as far as I'm concerned, is that overall municipal credit is high, but it's fallen," municipal credit analyst Tom Kozlik said in an interview. "It's still in the very high range compared to the overall global scale and very high compared with corporate credit specifically, for example. But, when you look at the data you can see that overall municipal credit quality has fallen in recent years."
Janney's credit outlook for the state government sector remains stable.
Pennsylvania, Illinois and New Jersey the last three months received bond-rating downgrades or lowered outlooks "for reasons not easily repairable," wrote Kozlik, who said structural, not cyclical, factors hurt all three. In addition, Kansas received two downgrades and Michigan's outlook was lowered over the past five months.
"New Jersey and Illinois are on a downward spiral. Pennsylvania hasn't been downgraded to New Jersey levels yet, but it has developed a structural imbalance similar to the one that ails New Jersey," Kozlik said. "If Pennsylvania doesn't make spending-related changes, the commonwealth will be in the same type of downward credit slope as New Jersey."
Janney managing director Alan Schankel noted that New Jersey's relatively tight trading spreads belie its lagging economic recovery and spiraling debt and pension liabilities.
In Pennsylvania, revenue typically arrives unevenly throughout the fiscal year, but the state's cash balance has, on average, been in steady overall decline. The 10-year average for early September is $2.241 billion,
In 2013 it stood at $2 billion in early September — still below average but not as dire — and Treasury was not asked to create a $1.5 billion internal line of credit by the administration until December. This year a loan is necessary three months earlier.
According to McCord, the general fund will repay Treasury by the end of the fiscal year at a 0.25% interest rate that, although modest, will still be enough to generate positive return for the taxpayers and for stakeholders in the so-called Pool 99 fund, a liquid asset pool that essentially serves as a money market fund.
Treasury probably would not have earned as high an interest rate from such short-term market investments as it is gaining in this case from the general fund, McCord said.
"Although the borrowing from the Treasury is not unusual for state governments and even local municipalities, the timing for the governor could not be worse as the generic public will look on this as Pennsylvania being in a bad fiscal situation," said David Fiorenza, a Villanova School of Business professor and a former chief financial officer of Radnor Township, Pa.
"Corbett and staff, however, are making the right decision as borrowing within the commonwealth saves on fees, transaction costs, and lower interest costs."
Kozlik cited this year's upgrades of California and New York as positives for the state sector.
"California improved its governance and better finances led to the Moody's upgrade," he said. "New York's upgrades were a result of improved budgetary management and spending constraint."
At the local level, Standard & Poor's earlier this month elevated its outlook on Los Angeles to positive from stable.
Janney retained a cautious outlook on local governments, many of which Kozlik said have had trouble adjusting to a post-recession economy.
Most alarming for localities, said Kozlik, is that in the second quarter of 2014, more than 50% of the downgrades occurred because of structural budget imbalances.
"When you look at the magnitude of those big, red bars that shows how many downgrades have occurred, that is significant," he said.
