Pennsylvania's removal Tuesday from S&P Global Ratings' credit watch with negative implications was no surprise to one in-state bond analyst.
"That made sense, given that Pennsylvania came in with a balanced budget," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.
S&P removed the commonwealth from the credit watch status and affirmed its AA-minus rating one week after Gov. Tom Wolf signed a $31.5 billion budget for fiscal 2017 that included an 11th-hour $1.3 billion revenue package.
"This rating action follows the passage of a revenue package to balance the budget in a relatively timely manner following the prior passage of a spending plan," said S&P credit analyst Carol Spain.
S&P assigned a negative outlook because it views the new budget as structurally imbalanced and possibly based on overly optimistic revenue assumptions.
State officials had postponed this week's scheduled bond sale to update disclosure documents.
Moody's Investors Service affirmed its Aa3 rating and negative outlook for Pennsylvania GOs while Fitch Ratings maintained the stable outlook on its AA-minus rating.
Rating agencies have downgraded Pennsylvania five times in the past three years.
"I was disappointed that the deficit-closing measures were not more significant and recurring," said Schankel. "When I looked at the documents it was hard to tell what some of the items were."
Fitch last week said the spending plan reflects "slow progress" toward structural balance.
"It relies on a mix of recurring and non-recurring measures to achieve balance," Fitch said.
The budget includes a $200 million increase, or 3.5%, in basic aid funding for K-12 education, allocated by the commonwealth's new funding formula that accounts for various socioeconomic factors for each district.
"It's a positive that there are more funds for pre-K and elementary schools, and more funding on the table in general for beleaguered school districts, which is vitally important," said William Rhodes, chairman of the public finance department at Philadelphia law firm Ballard Spahr LLP and practice leader of its municipal recovery initiative.
The legislature filled the gap through a patchwork of tax hikes and revenue assumptions.
According to the left-leaning Pennsylvania Budget and Policy Center, balance is a term of convenience; stop-gap measures amount to $709 million, or more than half the revenue package.
Revenue measures include borrowing $200 million from a surplus in a state medical malpractice insurance fund; raising the cigarette tax by $1 per pack to $2.60; eliminating the exemption from Pennsylvania's 6% sales tax for digital downloads; and assuming roughly $150 million from liberalized liquor sales and $100 million each from online gambling expansion and improved collection of back taxes.
Charles Mitchell, president and chief executive of the free-market think tank Commonwealth Foundation, said no state has ever succeeded long-term by expanding taxes on gambling and tobacco.
The previous budget was nine months late, with Democrat Wolf and the Republican-controlled legislature unable to reach a common ground.
Wolf in March let the fiscal 2016 spending plan become law without his signature.
"I was happy to see both sides of the aisle work to avoid the debacle we had last year and come to a settlement," said Schankel.