Pennsylvania’s budget inaction has prompted more bond-rating agency wrath.

S&P Global Ratings on Thursday placed its AA-minus general obligation rating on the commonwealth on credit watch with negative implications.

Alan Schankel of Janney Capital Markets expects "robust" retail demand to compliment strong institutional demand on Illinois GOs
“They don’t have the revenue side of the budget worked out,” said Janney Capital Markets managing director Alan Schankel.

The state legislature last week passed a $32.2 billion fiscal 2018 budget without a matching revenue stream. The spending plan lacks a tax-and-revenue package, which Gov. Tom Wolf’s administration and lawmakers are negotiating.

“They don’t have the revenue side of the budget worked out,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

The revenue portion may include tobacco-settlement bonding to cover a deficit. Wolf last week estimated the borrowing, which he called one-time, at between $1 billion and $1.5 billion. S&P on Thursday pegged the amount at $2 billion.

S&P said the watch affects its A-plus rating on Pennsylvania appropriation debt, its A rating of departmental debt and A-minus rating of the commonwealth's moral obligations.

“The credit watch action reflects Pennsylvania's eroding financial position and our view that there is a significant likelihood that the commonwealth will not enact a structurally balanced budget for fiscal 2018,” said analyst Carol Spain. “However, if lawmakers continue to negotiate and bring the budget into structural alignment within a 90-day timeframe, we could remove the ratings from credit watch.”

S&P questioned whether legislators can agree on a plan by Monday. The state’s constitution requires a balanced budget.

Pennsylvania has been frequently late with budgets the past few years, notably in fiscal 2016, when the spending plan was nine months tardy. Bond rating agencies have pummeled the commonwealth with a series of downgrades.

Fitch Ratings also assigns an AA-minus rating to Pennsylvania GOs, while Moody’s Investors Service rates them Aa3.

“While it is not uncommon for states to have periodic structural imbalance, Pennsylvania's chronic misalignment and eroding general fund position, particularly during a period of economic growth, demonstrate a pattern of financial mismanagement,” said Spain.

Pennsylvania’s approach parallels what it did last year when Wolf, a Democrat working with a Republican legislature, signed the revenue plan on July 13. This year the governor has until Monday to sign the bill, veto it or allow it to take effect without his signature.

According to Spain, S&P could lower the rating if legislators enact a budget that relies on “what we view as optimistic assumptions or one-time sources.”

As of Thursday afternoon, seven states including Pennsylvania lacked full budgets, though some have adopted temporary plans. The fiscal year began on July 1.

The other states are Illinois, Connecticut, Massachusetts, Oregon, Rhode Island and Wisconsin.

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