Fitch Ratings said it revised Pennsylvania's outlook to positive from stable based on its recent moves to boost its reserve levels.
“The outlook revision reflects Pennsylvania's recent use of a significant revenue surplus to build its reserves to historical highs, suggesting a potentially material improvement in the commonwealth's operating performance,” Fitch said.
At the same time, Fitch affirmed the state’s issuer default and general obligation bond ratings at AA-minus. Additionally, Fitch affirmed the A-plus ratings on bonds supported by commonwealth appropriations and on the state’s school credit enhancement programs linked to the IDR.
Fitch said the AA-minus IDR and GO ratings reflect its assessment of state operating performance as moderate, as well as a low long-term liability burden. It also takes into account a flexibility by the state to manage spending pressures, which offset modest revenue growth and "a historically contentious decision-making environment."
The GOs are direct obligations of the state backed by its full faith and credit pledge.
The appropriation-backed bonds issued by the Commonwealth Financing Authority and the Pennsylvania Economic Development Financing Authority are supported by annual appropriations. The CFA appropriation does not require annual renewal and can be amended or repealed by the legislature.
“The ratings on the various school credit enhancement programs reflect Pennsylvania's overall credit quality, as well as the breadth and strength of the commonwealth's school aid intercept statutes and associated security features,” Fitch said.
Fitch noted that pandemic-released aid from the federal government boosted economic activity in the state, driving economic growth and revenue gains far above initial expectations.
Under the American Rescue Plan Act, the state is set to receive $7.3 billion in direct aid from the Coronavirus State and Local Fiscal Recovery Fund. It will also get $279 million from the Coronavirus Capital Projects Fund.
“The commonwealth has not determined how it will utilize ARPA receipts and Fitch anticipates this will be a key topic for the legislature during the current session,” the rating agency said. “Fitch anticipates Pennsylvania will direct the vast majority of ARPA towards one-time uses, mitigating the risk of a fiscal cliff.”
