Pennsylvania's prolonged budget impasse is a credit negative for school districts and community colleges that rely on state-aid distributions for operating and debt-service costs, according to Moody's Investors Service.

School districts and community colleges have had to use reserves during the five-month stalemate between Democratic Gov. Tom Wolf and the Republican-dominated legislature over the fiscal 2016 spending plan. Many have turned to short-term borrowing to cover expenses awaiting a budget deal.

"The longer this impasse continues, the more entities will need to rely on market access to meet their obligations," Moody's said in a Nov. 13 commentary.

Two days earlier, Wolf and legislative leaders confirmed that the broad outlines of a roughly $30 billion budget agreement are in place, including a commitment from lawmakers for an additional $350 million in basic education funding. Wolf, elected in 2014, pledged to boost education spending during his campaign.

The sides hope to reach agreement by Thanksgiving, though unfinished business is extensive. At play is a proposal to boost the sales tax to 7.25% from 6% and the shifting of $600 million in gambling revenue to the general fund to offset the commonwealth's high pension-obligation costs.

All three major bond rating agencies last year downgraded Pennsylvania, citing budget imbalance and its estimated $53 billion unfunded pension liability. Moody's rates Pennsylvania Aa3 with a negative outlook. Fitch Ratings and Standard & Poor's rate them AA-minus, with stable outlooks.

State aid is a primary revenue source for Pennsylvania K-12 school districts. According to Moody's, they averaged 38% of total revenues in fiscal 2014. State aid pays an average of 50% of Pennsylvania community colleges' debt service and is "a vital revenue stream that represented between 22-35% of fiscal 2014 operating revenue," said Moody's.

Cash flow needs are greater for school districts. Philadelphia had to borrow roughly $275 million. As of Oct. 31, 25 school districts and two intermediate units have borrowed more than $432 million and face a combined $14 million in interest fees on these loans.

"Need for market access expected to increase for both sectors as budget impasse continues," said Moody's. "While short-term borrowing is typically uncommon for most school districts under normal circumstances, borrowing is only expected to increase the longer the state continues without a budget."

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