Moody's Investors Service said it has downgraded to Aa2 from Aa1 the rating on the commonwealth of Pennsylvania's outstanding general obligation bonds, and assigned a Aa2 rating to the general obligation bonds, first refunding series of 2012.

Bond proceeds will refund portions of seven outstanding general obligation series for net present value savings, with no change in final maturities.

The outlook has been revised to stable from negative.

At this time, Moody's has also downgraded by one notch all ratings notched off the state's general obligation including appropriation-backed bonds and the programmatic ratings of the state's intercept programs.

The downgrade to the Aa2 general obligation rating is based on the commonwealth's weakened financial position, and the expectation that large and growing pension liabilities and moderate economic growth will challenge the return to structural balance, contributing to a protracted financial recovery.

The downgrade also reflects the commonwealth's high debt position, related to moderate bonded debt levels and a sizeable unfunded pension liability.

The Aa2 rating also incorporates the relative stability of the commonwealth's economy and its demonstrated resilience post-recession; and a governance structure that allows it to make budget adjustments swiftly when necessary; the improved governance and financial flexibility reflected in the second consecutive timely budget adoption; and the recent, modest strengthening of revenue growth trends.

The stable outlook reflects the expectation that the commonwealth's diverse economy has stabilized but will grow slower than the U.S. on average. In addition, the recent history of improved governance, reflected in timely budget adoption and proactive financial management, will support a stable financial position despite the challenge of growing fixed costs.

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