Pennsylvania to sell $469 million after rating outlook is cut

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Pennsylvania, coming off an outlook cut from S&P Global Ratings, expects to come to market on Wednesday with a competitive $469 million general obligation first series of 2020 bond sale.

S&P on Sept. 1 revised its outlook to negative from stable, with analyst Jillian Legnos citing at least a one-third chance of a downgrade.

“The commonwealth must confront substantial fiscal challenges in the wake of the COVID-19 pandemic that could deepen its structural imbalance in the face of steep revenue declines, significantly increased liquidity demands, and limited recourse in the near term,” she said.

S&P affirmed its A-plus rating while Fitch Ratings and Moody’s Investors Service affirmed theirs at AA-minus and Aa3, respectively. Fitch and Moody’s assign stable outlooks.

PFM is the financial advisor for the sale.

Municipal bond analyst Joseph Krist, who said S&P’s negative outlook “makes perfect sense,” cited political bickering as the core of Pennsylvania’s budget problems. Gov. Tom Wolf, a Democrat, works with a Republican-dominated legislature and for generations, city and rural interests have clashed.

“S&P makes all of the salient points except they can't really say out loud that ‘it's the politics, stupid,’” Krist said.

“Wolf would be viewed as a moderate anywhere else in the Northeast, but the Republicans treat him like he's a Marxist. They can't come up with a taxing formula that would take more from the people the legislature doesn't like — Pittsburgh and Philadelphia and their outsized shares of gross state product — and still comes off as fair.”

Pennsylvanians, Krist said, would probably support a graduated income tax rate and enabling school districts to levy taxes more related to income versus property. “It’s the legislature that wouldn’t do it.”

S&P also revised its outlook to negative from stable on several outstanding priority-lien debt obligations that link to the commonwealth.

They include its AA-minus rating on Allegheny County Port Authority's special revenue transportation bonds; its AAA rating on Pennsylvania Intergovernmental Cooperation Authority's special tax bonds (City of Philadelphia Funding Program); its AA-minus rating on Pennsylvania Turnpike Commission oil franchise tax senior bonds, and its AA-minus rating on Southeastern Pennsylvania Transportation Authority's bonds (Public Transportation Assistance Fund).

Pennsylvania’s challenges include a weak three-year-average funded ratio of 56.9% across the commonwealth's pension plans, which S&P said incorporates a fiscal 2019 funded ratio of 55.7% for Pennsylvania School Employees Retirement System and 63.1% for Pennsylvania State Employees Retirement System as of Dec. 31.

PSERS’ board last month unanimously voted to pull nearly $2 billion from Wall Street firms, reallocating into stocks, commodities and infrastructure.

State Treasurer Joe Torsella praised the move.

“It’s time that more pension funds wake up to the fact that Wall Street has, in many cases, sold them something close to modern-day snake oil,” Torsella said.

According to Moody’s, fiscal 2020 reporting of net pension liabilities will increase based on lower investment returns and interest rates in 2019. The fiscal 2019 average return of 6.6% was below the average target return of 7.2%. Moody’s said in its Wednesday report.

Moody’s estimates that aggregate state adjusted net pension liabilities will increase to $1.76 trillion nationally in FY2020 reporting, up 19% from FY19.

According to Torsella’s fiscal-health scorecard, Pennsylvania ranks in the lower third among the states in pension funding, fixed costs as percent of budget, and other post-employment benefits ratio as percent of budget.

The commonwealth passed a $25.8 billion interim fiscal 2021 budget in May that funds the state through the end of November, when the fall session ends.

Gov. Tom Wolf has been calling on state lawmakers to consider the legalization of adult-use cannabis to help with the state’s recovery from the coronavirus. Eleven states plus the District of Columbia have legalized such use.

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