Standard & Poor's Ratings Services said it revised its outlook to negative from stable on the commonwealth of Pennsylvania's general obligation debt outstanding.
At the same time, Standard & Poor's affirmed its AA rating on the commonwealth's GO debt.
"The outlook revision reflects our view that growing expenditure pressures and primarily pensions, coupled with a slow economic growth environment and limited available reserves, could place downward pressure on the rating," said Standard & Poor's credit analyst John Sugden.
As a result of this rating action, Standard & Poor's also revised its outlook to negative from stable on the state's appropriation-backed debt (rated AA-minus) and moral obligation debt (rated A). The ratings on this debt are also affirmed.
Finally, Standard & Poor's assigned its AA rating and negative outlook to Pennsylvania's $363.555 million first refunding series of 2012 GO bonds.
The GO rating reflects Pennsylvania's diverse economic base, which experienced weakness commensurate with the recession; good wealth levels, with personal income per capita at 102% of the nation in 2010; and moderate debt profile. Pennsylvania, however, expects debt levels to rise and exceed the rate of current debt retirement due to its planned issuance to fund aging infrastructure and provide economic stimulus.
Offsetting factors include: significantly weakened financial performance and reserves and continued budgetary pressures tied to growing service demands and lower-than-budgeted revenue growth; and the growing state unfunded pension liability and increased funding costs, which are likely to stress the state's budget.
The series 2012 bonds are secured by Pennsylvania's full faith and credit pledge. Management plans to use proceeds to economically defease previously issued debt.
The negative outlook on Pennsylvania reflects growing expenditure pressures, primarily pensions, coupled with a slow economic growth environment and limited available reserves, which could place downward pressure on the rating.
Although the state has made some progress in reducing its reliance on one-time revenues, pressures associated with expenditure growth related to its pension obligations remain.
The revised outlook reflects the potential for S&P to lower the state rating to AA-minus in the next two years in the absence of meaningful pension reform efforts or significant economic growth that would help mitigate the impact of growing pension costs on Pennsylvania.
An additional risk to the rating includes the potential for significant reductions in federal funding that flows to the state. Standard & Poor's will continue to monitor the federal consolidation efforts stemming from the Budget Control Act and, once these are identified, will evaluate their effect on Pennsylvania's finances and the state's response to these revenue reductions.
Should the state make significant strides in addressing its pension liabilities or experience substantial economic growth that would mitigate the impact of these liabilities on the budget, the outlook could return to stable.
