Pennsylvania's intercept programs for distressed school districts remain a strong credit feature despite downgrades related to the state's budget impasse, according to Janney Capital Markets.
The programs "have historically added an important layer of bondholder security to school district bonds," municipal analysts Alan Schankel and Eric Kazatsky wrote in a commentary. Under three programs, the commonwealth can intercept aid and pay debt service directly to the paying agent.
Pennsylvania has operated without a full budget for nearly eight months, with first-term Democratic Gov. Tom Wolf and the Republican-dominated legislature at odds over how to fund a roughly $30 billion spending plan. The fiscal year began July 1.
Wolf in late December signed a budget that funded about 80% of the plan, vetoing line items on state aid for basic education and asking the legislature to increase the funding for it.
The partial budget enabled school districts and social service agencies to receive critical state reimbursement funds.
Intercept programs, long supported by legislation, enable many school districts to earn higher ratings and finance capital projects at lower rates.
S&P, in one of several negative rating actions by the three major bond rating agencies during the impasse, withdrew all intercept-based ratings, which had been A-plus and A for pre-default and post-default, respectively.
Moody's in September downgraded 163 pre- and post-default ratings to A2 from A1 and A3 from A2, respectively. One month later it revised its outlook on Pennsylvania's general obligation bonds to negative from stable. On Dec. 22, Moody's downgraded the cap on most intercept-based ratings to Baa1 from A3 and eliminated the rating distinction between pre-default and post-default.
Philadelphia took a hard hit from the rating agencies, Last June, before the budget drama accelerated, the district had enhanced ratings of A1 from Moody's and A-plus from Fitch and S&P, while its underlying ratings were Ba3 from Moody's Investors Service and BB-minus from Fitch Ratings.
After three Moody's downgrades and withdrawal of the S&P rating, Philadelphia maintained its underlying ratings, but its intercept-based rating is now Ba2 from Moody's.
Fitch has taken no rating actions yet on Pennsylvania's budget problems.
"While this analysis does not serve as an in-depth financial review of the district, we do consider Philadelphia's participation in the state intercept program and individualized collection and payment mechanics unique to the district," said Janney. "In doing so, it is important to note that ongoing structural deficits remain an albatross around the neck of the district and examination of underlying fundamentals should be part of any pre-purchase due diligence."