Pennsylvania gets upgrade from Moody's ahead of big GO deal

Moody’s upgraded Pennsylvania’s issuer default rating to Aa2 from Aa3 Monday, ahead of the commonwealth’s plans to sell at least $1.4 billion of general obligation bonds.

The Keystone State is now at its highest rating since 2013, before the state’s finances were mired by partisan conflict between and among the two houses of the legislature and the governor’s office.

The rating report cited the Keystone State’s “significant increases in its budget stabilization reserves and moderated pressure from long-term liabilities.”

The State Capitol in Harrisburg, Pennsylvania. Moody’s upgraded the Keystone State to Aa2 Monday.

Bloomberg News

Pennsylvania’s budget practices reduce its historic credit weaknesses, Moody’s analysts wrote, and “will provide important flexibility in the event of future budget stress.”

The ratings report acknowledged Pennsylvania’s “large and diverse economy, solid financial position, and moderate combined long-term liabilities balanced by relatively weak demographic and revenue trends and growing demands on spending, especially K-12 school aid.”

The rating review came in connection with plans to sell at least $1.4 billion of new money bonds and refund some $200 million more.

The deal, according to Fitch Ratings, would come via competitive bid on or around Oct. 16. As of Monday evening, it was not yet announced by the commonwealth or placed on the competitive deal calendar.

Fitch affirmed its AA issuer default and general obligation bond rating and stable outlook for Pennnsylvania Oct. 1, and S&P Global Ratings affirmed its A-plus rating Tuesday. It maintains a positive outlook.

The commonwealth has amassed significant reserves, Moody’s report said. Its rainy day fund stands at $6.8 billion and there’s $7.4 billion in the general fund balance, although Moody’s analysts expect the latter to be spent soon.

In the past, Pennsylvania’s penchant for legislative infighting and budget impasses has damaged the state’s credit fiscal stability.

The state’s rainy reserve fund was empty for nine years until a $22 million deposit in 2018 under Gov. Tom Wolf.

Moody’s Pennsylvania rating dropped from Aa1 in 2011 to Aa3 in 2014, according to the Pennsylvania Treasury.

A nine-month budget impasse in 2015 didn’t garner Pennsylvania any points for governance. In 2017, it was so short of money amid budget delays that the commonwealth’s treasurer and auditor general twice had to lend money from the treasury’s investment pool to the general fund.

Since 2018, the Keystone State has gradually invested more money into its rainy day fund, which is big enough to fund 53 days of general fund spending, above the 50-state median, according to the Pennsylvania Treasury, though it remains split between a Democratic governor and GOP-controlled legislature.

This year’s budget included a $740 million deposit into the rainy day fund, but also spent around $3 million of the general fund’s reserves.

According to Moody’s, factors that could raise the commonwealth’s rating include a sustained return to structurally balanced budgets and maintained reserves, continued economic growth and job creation, strong pension plan asset performance to moderate the unfunded liability burden, and sound governance.

Pennsylvania’s last rating change was in November of 2023, when Fitch Ratings upgraded the state to AA from AA-minus. That fall also saw S&P Global Ratings and Moody’s both change Pennsylvania’s outlook to positive from stable.

Several issuers linked to Pennsylvania’s state rating received upgrades as a result of the action.

Moody’s also upgraded the commonwealth’s outstanding appropriation backed debt and lease ratings to Aa3 from A1 and to A1 from A2; the Pennsylvania School District Intercept Program to Aa3 from A1; the Pennsylvania General Municipal Pension System State Aid Program to A1 from A2; and the Pennsylvania Turnpike Commission’s outstanding Motor License Fund-enhanced Turnpike Subordinate Special Revenue Bonds to Aa3.