Aa2 rating also assigned to $363.6 million of General Obligation Bonds, First Refunding Series of 2012
New York, July 16, 2012 --
Moody's Rating
Issue: General Obligation Bonds, First Refunding Series of
2012; Rating: Aa2; Sale Amount: $363,555,000;
Expected Sale Date: 7-24-2012; Rating Description:
General Obligation
Opinion
Moody's Investors Service has downgraded to Aa2 from Aa1 the rating on
the Commonwealth of Pennsylvania's outstanding general obligation bonds,
and assigned a Aa2 rating to the General Obligation Bonds, First
Refunding Series of 2012. Bond proceeds will refund portions of
seven outstanding general obligation series for net present value savings,
with no change in final maturities. The outlook has been revised
to stable from negative.
At this time, Moody's has also downgraded by one notch all
ratings notched off the state's general obligation including appropriation-backed
bonds and the programmatic ratings of the state's intercept programs.
SUMMARY RATING RATIONALE
The downgrade to the Aa2 general obligation rating is based on the commonwealth's
weakened financial position, and the expectation that large and
growing pension liabilities and moderate economic growth will challenge
the return to structural balance, contributing to a protracted financial
recovery. The downgrade also reflects the commonwealth's
high debt position, related to moderate bonded debt levels and a
sizeable unfunded pension liability. The Aa2 rating also incorporates
the relative stability of the commonwealth's economy and its demonstrated
resilience post-recession; and a governance structure that
allows it to make budget adjustments swiftly when necessary; the
improved governance and financial flexibility reflected in the second
consecutive timely budget adoption; and the recent, modest
strengthening of revenue growth trends.
The stable outlook reflects the expectation that the commonwealth's
diverse economy has stabilized but will grow slower than the U.S.
on average. In addition, the recent history of improved governance,
reflected in timely budget adoption and proactive financial management,
will support a stable financial position despite the challenge of growing
fixed costs.
STRENGTHS
* Diverse, broad, and relatively stable economy,
with wealth levels slightly above the national average, buttressed
by its large health and higher education sectors
* Recent improvements in governance, resulting in two consecutive
timely budgets, significantly reduced reliance on non-recurring
resources, and a demonstrated willingness to balance revenue shortfalls
early in the fiscal year
*Strong executive authority to cut or freeze appropriations mid-year
CHALLENGES
* The commonwealth's financial position and liquidity remain weak
relative to its historic position and deteriorated in fiscal 2012 due
to budgeted use of reserves to balance appropriations; commonwealth
will likely resume cash flow borrowing in fiscal 2013
* High combined debt position driven by growing unfunded pension liabilities,
and a seven-year history of significantly underfunding pension
contributions that will be reversed slowly over the next five years
* Rapidly growing pension contributions will absorb much of the commonwealth's
financial flexibility over the next five years, challenging the
commonwealth's ability to return to structural balance or make meaningful
contributions to the depleted budget stabilization fund
* Demographic trends will limit long-term growth prospects
given the history of below-average population growth and above-average
age, challenging economic recovery and revenue gains
Outlook
The stable outlook reflects the expectation that the commonwealth's
diverse economy has stabilized but will grow slower than the U.S.
on average. In addition, the recent history of moderate revenue
growth and improved governance, reflected in timely budget adoption
and proactive financial management, will support a stable financial
position despite the challenge of growing fixed costs.
WHAT COULD MAKE THE RATING GO UP
*Higher than expected economic growth that accelerates sustained revenue
gains above budgeted projections
*Sustained replenishment of reserves and liquidity position
*Material reduction in long-term liabilities, including
unfunded pension liabilities, and their associated budgetary pressure
*Continued sound budgetary and financial management that supports
financial flexibility and structural balance
WHAT COULD MAKE THE RATING GO DOWN
*Further economic deterioration that leads to worse-than-expected
revenue performance
*Higher-than-budgeted depletion of reserves in the near
term or an inability to restore budget stabilization fund over the medium
term
*Further liquidity decline that results in increased external cash
flow borrowing, deferred payments, or other cash management
tools
*Growth in long-term liabilities, increase in fixed cost
pressures, or additional deferral of pension costs
The principal methodology used in this rating was Moody's State Rating
Methodology published in November 2004. Please see the Credit Policy
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
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Baye Blakeslee Emery Larsen
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
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Emily Raimes
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Moody's downgrades to Aa2 from Aa1 Pennsylvania's general obligation rating; outlook revised to stable from negative
