Amid rising yields and budget strife, Pennsylvania intends to competitively sell $613 million of general obligation refunding bonds Wednesday.
Pennsylvania joins New Jersey and Connecticut -- all lower-rated states -- bringing GO offerings in a muni primary week with volume approaching $10 billion.
"Generally, rising yields combined with widening credit spreads are increasing borrowing costs," said Alan Schankel, a managing director with Janney Capital Markets in Philadelphia. Schankel cited New Jersey's $971 million sale last week of appropriation-backed school facilities construction bonds, which Barclays Capital priced.
The New Jersey deal, said Schankel, marked the return of the 5% yield to the mainstream muni market as the 25-year maturity priced with a 5% coupon to yield 5.18%, 183 basis points above the AAA benchmark.
New Jersey ratings have fallen to single-A levels.
S&P Global Ratings and Fitch Ratings assign AA-minus rating to Pennsylvania GOs with outlooks of negative and stable, respectively. Moody's Investors Service rates them Aa3 with a negative outlook.
Public Financial Management Inc. and Sustainable Capital Advisors are co-financial advisors. The bonds will mature in 2029.
According to Janney director Eric Kazatsky, the timing of the Pennsylvania deal is interesting given the spike in yields and the number of offerings pulled.
"The motivation could be twofold in that first, the commonwealth is concerned about further upward movement in rates and credit spreads, and second, current budget deficits could impact market perception of the credit."
Pennsylvania's Independent Fiscal Office last month projected
"While recently enacted revenue enhancements and expenditure policies had a meaningful impact on the [fiscal 2017] budget, the impact diminishes over time," said IFO Director Matthew Knittel. "Therefore, the long-term fiscal outlook is largely unchanged from last year."
The commonwealth's budget imbalance and a statewide unfunded pension liability estimated at roughly $70 billion -- thanks to chronic underfunding -- have triggered five bond-rating downgrades since 2014.
Pennsylvania's fiscal 2016 budget was 16 months late before Gov. Tom Wolf let it become law without his signature.
In July, Wolf signed a $31.5 billion fiscal 2017 spending plan after lawmakers filled a $1.3 billion gap through a patchwork of tax hikes and revenue assumptions. During the impasse, school districts throughout the state had to borrow more than $1 billion before reimbursement funding came in.
S&P said Thursday that school districts could face more funding pressure due to sluggish state revenue growth and rising costs. Debate over funding for public education has contributed to Pennsylvania's last two budget impasses.
"In our view, recently projected budget deficits for fiscal years 2017 and 2018 increase the likelihood that education funding could be a key budget issue again in fiscal 2018, potentially contributing to another year of protracted deliberations," wrote credit analyst Carol Spain.
"In addition to the possibility of a late budget, given limited discretionary spending, lawmakers could turn to education funding cuts to balance the budget. Both outcomes would increase credit pressure on Pennsylvania school districts."
Of the IFO's projected fiscal 2018 increase in expenses, roughly 15% reflects higher discretionary spending, said Spain. Other rising costs include human services, pension contributions, general fund debt, corrections, and required expenditures.
"Given the large deficit, limited discretionary share of increased spending, and other spending increases that could take on higher priority, such as pension contributions, we think that it is likely that lawmakers would choose to keep flat or cut education spending," said Spain.
Wolf, a Democrat often at odds with the Republican-controlled legislature, is scheduled to present his fiscal 2018 budget next month. The GOP holds a 122-81 edge in the House of Representatives and a 34-16 advantage in the Senate.
