Pennsylvania downgrade prompts call for budget action
Pennsylvania’s downgrade Wednesday from S&P Global Ratings — the latest in a series of negative actions from the capital markets over three years — prompted Gov. Tom Wolf to call for immediate action on a $2.2 billion, budget-balancing revenue plan that is three months late.
“For months, I have warned that a credit downgrade was looming,” Wolf said in a statement after S&P lowered its general obligation rating on the commonwealth to A-plus from AA-minus. “Today’s news should be a wake-up call to come together and end this now.”
S&P, which assigned a stable outlook, also lowered its rating on the commonwealth's appropriation debt to A from A-plus. Additionally, it lowered its departmental appropriation rating to A-minus from A and its departmental and moral obligation rating to BBB-plus from A-minus.
S&P fired a warning shot on July 6, putting the commonwealth’s GOs on credit watch with negative implications. Wednesday’s action marks the sixth downgrade or negative credit watch by S&P alone since 2012.
“The downgrade largely reflects the commonwealth’s chronic structural imbalance dating back nearly a decade, a history of late budget adoption and our opinion that this pattern could continue,” said S&P analyst Carol Spain.
Pennsylvania becomes the fourth state with at least one rating below the AA category, said Alan Schankel, a managing director with Janney Capital Markets. The others are Illinois, New Jersey and Connecticut.
Moody’s Investors Service and Fitch Ratings rate Pennsylvania GOs Aa3 and AA-minus, respectively.
According to Spain, the new rating also reflects Pennsylvania’s weakening liquidity, notably the delay or nonpayment of scheduled expenses for the first time. She said consequences of the budget stalemate extend beyond policy considerations and into credit quality.
Measured on an annual basis, said Spain, Pennsylvania’s structural deficit remains manageable, “but its reliance on one-time revenues has stressed its available cash, making internal resources insufficient to timely meet certain obligations.”
This marks the third consecutive late budget for Democrat Wolf and the Republican-controlled legislature since he took office in January 2015. In July, Wolf let a $32 billion spending plan for fiscal 2018 become law without his signature, asking lawmakers to approve a revenue package later. The $2.2 billion revenue plan is roughly 7% of expenditures, and is rising.
The House of Representatives, however, has balked at the Wolf-approved revenue and tax bill that the Senate passed in late July.
That bill included new taxes on natural gas production and energy consumption, combined with roughly $1.25 billion of certificates of participation secured by tobacco-settlement payments. Wolf objects to a House revenue plan that features no tax increases, saying it merely transfers $600 million from off-budget accounts, provides no recurring revenues and fails to grasp Pennsylvania's long-term deficit.
Wolf has promised more doomsday action if no budget compromise is in place by Oct. 1. He was expected to postpone this week a planned $581 million payment for the commonwealth's share of pension obligations to public school teachers and employees.
Last Friday, as Pennsylvania’s fund balance neared zero, he held back roughly $1.2 billion in payments to Medicaid program providers. In August he authorized the borrowing of $700 million from the commonwealth's motor license fund, including $241 million to make its distribution to its school districts.
State Treasurer Joe Torsella and Auditor General Eugene DePasquale said they would no longer sign off on short-term borrowing. Torsella in August authorized a two-week $750 million line of credit, which the state repaid at an interest rate of 85 basis points.
“This downgrade should come as a surprise to no one,” Torsella said Wednesday. “These actions result in a backdoor tax for Pennsylvanians, as costs increase for the state to borrow money in the future. “
Torsella also called the downgrade “a symptom of a chronic illness in our budgetary process,” and warned that Pennsylvania is vulnerable to further action.
Spain said even without access to the short-term investment program, the commonwealth retains “very strong access to external markets,” and could tap them to cover any general fund deficit.
“Without more cash-flow borrowing, the state may soon have to begin prioritizing some expenditures over others,” Moody’s said in a commentary.
“Even with cash-flow borrowing, fiscal 2018 promises to be a messy one for Pennsylvania, since it must repay all cash-flow borrowings within the fiscal year, and would probably have trouble doing so without an adjustment to revenues or expenditures.”
In a report that compared Pennsylvania’s strife with that of Connecticut, also without a budget and home to repeated downgrades and the potential bankruptcy of capital city Hartford, Moody’s said their standoffs have different implications for short and long term.
“Pennsylvania’s situation presents near-term liquidity risks, while Connecticut is unlikely to face imminent liquidity shortages but faces greater long-term pressures stemming from very high liabilities and a lagging economy,” said Moody’s.