Fitch Ratings has taken Pennsylvania off rating watch negative.

The rating agency late Tuesday affirmed its AA-minus general obligation rating for the commonwealth while assigning a negative outlook.

Pennsylvania’s budgets have been chronically late. For fiscal 2018, Gov. Tom Wolf ended a four-month impasse in late October, signing a series of bills aimed at balancing the commonwealth’s $32 billion plan, including authorizations on casino gambling expansion and tobacco debt.

Gov. Tom Wolf signed budget bills that include authorizations for casino gambling expansion and tobacco debt. Pennsylvania Internet News Service

“The negative outlook reflects Fitch’s view that budget measures taken by Pennsylvania in recent years have reduced its financial resilience,” the rating agency said in a statement. “Nonrecurring measures and a lack of reserves have been consistent features of commonwealth budgets, including in the just-enacted fiscal 2018 plan, putting Pennsylvania more at risk in event of a moderate economic downturn.”

Pennsylvania has cut baseline spending and enacted recurring revenue changes.

“But fiscal pressures in the form of a structurally unbalanced budget, brought on by rising fixed costs, modest baseline revenue growth and a particularly contentious decision-making environment have limited the commonwealth's fiscal flexibility,” said Fitch.

S&P Global Ratings and Moody’s Investors Service rate Pennsylvania GOs A-plus and Aa3, respectively.

Municipal Market Analytics called Pennsylvania’s $1.5 billion tobacco financing “a straightforward $1.5 budget gimmick [that] will and should receive downgrades.”

“Several state budgets continue to worsen, with negative implications for regional ratings and spreads,” MMA added. “There is little reason to expect Pennsylvania credit or budget performance will improve in the near term.”

Democrat Wolf and the Republican-controlled legislature have been at odds since he took office in January 2015. Warring factions within the GOP have also contributed to the dysfunction at the capitol.

According to Fitch, ongoing development of significant natural gas reserves could benefit Pennsylvania, though a weakened market tempers that potential.

“Overall, the state's economy provides a solid base for future potential revenue growth to help manage ongoing expenditure pressures,” said Fitch.

Fitch expects structural imbalance to continue to nag Pennsylvania.

“The AA-minus [issuer default rating] and negative outlook indicate the commonwealth may be challenged in continuing its current path of slow progress in reducing the imbalance through new recurring revenues, expenditure reductions, or a mix of both,” said Fitch.

According to Fitch, weakening fiscal practices, including a worsening of the structural deficit, could trigger a downgrade.

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Paul Burton

Paul Burton

Paul Burton is the Northeast Regional Editor for The Bond Buyer and the author of the book "Tales from the Newsrooms." He is a sought-after public speaker and has appeared on radio and TV shows, including former CBS News White House correspondent Sharyl Attkisson’s public-affairs program, “Full Measure.”