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Pennsylvania ‘Positive’: S&P Boosts Commonwealth’s Credit Outlook

S&P Global Ratings said Friday it revised Pennsylvania’s credit outlook to positive from stable. At the same time, S&P affirmed its A-plus long-term rating on the state’s $10.7 billion of outstanding general obligation (GO) bonds.

Considered the largest of the Big Three credit-rating agencies, S&P’s report includes an affirmation of its “A” rating on Pennsylvania’s appropriation debt.

“The positive outlook on all long-term ratings reflects our view of a one-in-three chance that we could raise the rating over the next two years if the state demonstrates a commitment to structural budgetary solutions that narrow or close projected out-year gaps, while also preserving or increasing reserve balances in its budget stabilization reserve,” said S&P Global Ratings credit analyst Geoff Buswick.

“Multiple credit rating agencies have now affirmed that our commonsense investments and sound fiscal management are setting the Commonwealth up for continued success as we work to create an economy that works for all,” said Gov. Josh Shapiro. “My Administration will strive to ensure that our fiscal outlook remains strong by working with leaders in both parties to continue making commonsense investments that support Pennsylvanians and create safer communities and healthier families, all while remaining fiscally responsible.”

S&P said the outlook reflects “our view that Pennsylvania has continued to make progress toward structural budgetary balance, with positive operating results in five of the past six years, leading to stronger reserves that are better aligned with state policies.”

“Pennsylvania taxpayers deserve sound financial management from their government – and this second positive rating outlook in September affirms that our efforts are working and that the Shapiro Administration is putting the Commonwealth on a path of fiscal stability,” said Secretary of the Budget Uri Monson.

The GO rating also reflects what S&P views as Pennsylvania’s:

  • Well-established priority of GO debt service, even in the absence of a budget;
  • Substantial ability–despite budget impasses–to adjust revenues, expenditures, and disbursements;
  • Recent reserve deposits that are expected to bring the budget stabilization reserve to approximately $5.2 billion, or a strong 11.8% of fiscal 2024 general fund expenditures;
  • Diverse economy, although growth within the commonwealth has trailed that of the nation historically; and
  • Moderate debt profile.

 

Offsetting these credit factors are what it considers the commonwealth’s:

  • Historically thin financial flexibility, although improved in recent years, coupled with limited projected revenue growth and rising fixed cost pressures stemming from large unfunded pension liabilities;
  • Projected revenue and expenditure misalignment, which we believe remains a risk to Pennsylvania’s credit profile despite some improvement in structural imbalance in recent years; and
  • Weak three-year-average funded ratio of 63% across Pennsylvania’s pension plans, although we expect it will hold above 60%, a threshold in our criteria.

 

The positive outlook reflects our view that Pennsylvania has continued to make progress toward structural budgetary balance, with positive operating results in five of the past six years, leading to stronger reserves that are better aligned with state policies. It also reflects our expectation that forecast out-year structural imbalances would be addressed with emphasis on sustainable solutions commensurate with the current rating level. In addition, we expect Pennsylvania’s liquidity position will remain stable in the near term.





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