Fitch upgrades Pennsylvania to AA citing record reserve buildup

Fitch Ratings has upgraded Pennsylvania’s issuer default and outstanding general obligation bond ratings to AA from AA-minus.

Fitch also raised the bonds supported by state appropriations to AA-minus from A-plus and the ratings on state school credit enhancement programs linked to the commonwealth’s IDR to AA-minus from A-plus. The rating outlook on all the bonds is stable, Fitch said late Monday.

Harrisburg, Pennsylvania’s state capital, at night. Fitch said its upgrade was also based on the state’s “improved operating performance, as well as a low long-term liability burden and broad flexibility to manage spending pressures, which offset modest baseline revenue growth and a historically contentious decision-making environment.”

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“The upgrade of Pennsylvania’s IDR and related ratings reflects recent use of revenue surpluses to build its reserves to historical highs and Fitch’s expectation that substantial reserves will be maintained in the near term, despite a political impasse that has delayed implementation of some items in the 2024 budget,” Fitch said.

“The AA IDR reflects Fitch’s assessment of improved operating performance, as well as a low long-term liability burden and broad flexibility to manage spending pressures, which offset modest baseline revenue growth and a historically contentious decision-making environment,” the agency said.

Separately, Fitch assigned AA ratings to the state’s $1.335 billion of first series of 2023 GOs and $787.165 million of first refunding series of 2023 GOs, which are slated to sell competitively on Dec. 6.

New money proceeds will be used for various capital projects. The GOs are direct and general obligations of Pennsylvania, which has pledged its full faith and credit.

Fitch also upgraded bonds supported by state appropriations and linked to the commonwealth’s IDR and carry the same stable rating outlook.

Some of the other issuers Fitch upgraded included:

Pennsylvania Commonwealth Financing Authority appropriation-backed debt to AA-minus from A-plus;
Pennsylvania Economic Development Financing Authority revenue bonds for the Convention Center Project to AA-minus from A-plus;
Pennsylvania School Credit Enhancement Intercept Program’s State School Bond Program Rating, or Intercept Program, Section 633 to AA-minus from A-plus;
Pennsylvania State Public School Building Authority, State Building Authority Intercept, Pennsylvania State Public School Building Authority, 785(a) to AA-minus from A-plus; and
Pennsylvania School Credit Enhancement Direct Pay Intercept Program, State School Bond Program Rating, Direct Pay Intercept Program, Pennsylvania State Public School Building Authority Direct Pay, 785(b) to AA-minus from A-plus.

In September, S&P Global Ratings raised Pennsylvania’s outlook to positive from stable and affirmed its A-plus long-term rating on the state’s $10.7 billion of outstanding general obligation bonds.

S&P said its 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.”

Also in September, Moody’s Investors Service revised its outlook on Pennsylvania to positive from stable and affirmed the state’s Aa3 issuer and GO ratings.

Additionally, Moody’s affirmed the state’s A1 and A2 ratings on outstanding appropriation backed debt, the A1 rating on the Pennsylvania School District Intercept Program and the A2 rating on the Pennsylvania General Municipal Pension System State Aid Program.