Moody's Affirms Pennsylvania's Negative Rating

Moody's Investors Service on Monday affirmed the Commonwealth of Pennsylvania's negative rating, saying it "reflects the likelihood that the commonwealth's credit challenges are likely to worsen in the near term absent political compromise."

Pennsylvania's General Obligation rating is Aa3, Moody's said. That rating is below the median for states in America.

Moody's says the "coming months will be crucial" for Pennsylvania, as lawmakers work to craft a new budget after a nine-month impasse.

While the rating recognizes the fundamental economic capacity Pennsylvania has to resolve its structural budget gap and fully fund its pension liabilities, the Aa3 rating - which is below the median for US states - also recognizes the hurdles it faces to do so in practice. The commonwealth is fundamentally capable of solving its problems, but the lengthy political stalemate that delayed the passage of a full-year budget until nine months into fiscal 2016 suggests practical difficulties regaining its footing in a structurally balanced fashion in the near future.

If lawmakers can balance the budget, Pennsylvania's credit could stabilize, Moody's says. "If not, further budget deterioration would likely apply downward pressure on the rating."

Moody's offered the following factors that could lead to an upgrade:

• Successful implementation of revenue increases or expenditure cuts to close the commonwealth's large structural budget gap
• Substantial progress toward achieving stronger pension funding levels
• Faster-than-expected economic growth that accelerates sustained revenue gains above budgeted projections
• Factors that Could Lead to a Downgrade
• Failure to address structural budget gap
• Failure to adhere to pension contribution schedule to improve pension funding
• Future budget impasses casting doubt on the commonwealth's ability to make fiscal improvements

Governor Tom Wolf reacted to the news, saying "we must address Pennsylvania’s structural budget deficit.”

“Either we can invest in education, eliminate the deficit, and put Pennsylvania back on track or we can continue on the same path with dire consequences. If we do not act, a more than $2 billion deficit will force cuts to education funding and human services while increasing property taxes for people across Pennsylvania," the governor said.