Moody's Investors Service has downgraded the Commonwealth of Pennsylvania's outstanding $11.1 billion general obligation bonds to Aa3 from Aa2. We have also downgraded the ratings
assigned to $2 billion of appropriation-backed bonds by one notch, as well as the programmatic ratings assigned to the state's intercept programs. The outlook is stable
SUMMARY RATING RATIONALE
The downgrade of the general obligation rating to Aa3 reflects the commonwealth's growing structural imbalance, exacerbated by the fiscal 2015 enacted budget that depends on non-recurring resources; a weak GAAP balance position that will further deteriorate based on the budget's one-time measures; and the expectation that large and growing pension liabilities coupled with modest economic growth will limit Pennsylvania's ability to regain structural balance in the near term.
The stable outlook reflects the commonwealth's diverse economy but below average growth, its recent history of improved governance reflected in timely budget adoption, and strong executive powers to control spending midyear.
STRENGTHS
* Diverse, broad, and relatively stable economy, with wealth levels slightly above the national average, buttressed by its large health and higher education sectors
* Recent improvements in governance, resulting in consecutive timely budgets
*Strong executive authority to cut or freeze appropriations mid-year
CHALLENGES
* Large and growing structural imbalance that reflects underperforming revenues, the continued use of one-time measures in the budget, and the ongoing deferral of restoring reserves
* High combined debt position driven by moderate bonded debt levels but growing unfunded pension liabilities as Pennsylvania continues to underfund pension contributions
* Demographic trends that limit long-term growth prospects given the age and slow growth of Pennsylvania's population
Outlook
The stable outlook reflects our expectation that the commonwealth's diverse economy has stabilized but will grow slower than the US on average. Additionally, the recent history of improved governance,
reflected in timely budget adoption and proactive financial management, will spur the commonwealth to proactively manage its budget to prevent additional weakness of its financial position despite the challenge of growing fixed costs.
