Moody's Investors Service Friday affirmed the Aa3 rating on the Commonwealth of Pennsylvania's General Obligation debt, but revised the outlook to negative. The action affects $10.9 billion of bonds.
Moody’s also affirmed the A1 and A2 ratings on the Commonwealth's appropriation bonds, affecting $2.4 billion of debt.
The Aa3 rating recognizes Pennsylvania's large and diverse economy, average bonded debt burden, and moderate trends in tax receipts. The rating, two levels below the 50-state median, also incorporates the Commonwealth's large pension liabilities, poor financial position following years of structural imbalance, and challenged political environment.
The negative outlook reflects the difficulty the Commonwealth is likely to have closing its structural budget gap in light of the contentious political environment. Pennsylvania is more than 100 days into an impasse over its budget for fiscal 2016, which began July 1.
Large tax increases in the executive budget proposal that are designed to close the Commonwealth's budget gap have failed to pass, while alternatives enacted by the legislature have been vetoed.
Meanwhile, ongoing expenditures exceed ongoing revenues by about $2 billion; the structural gap is higher accounting for the Commonwealth's pension contribution shortfalls relative to its actuarial required contributions.
Amid its extreme political gridlock, the Commonwealth will be challenged to find solutions to its fiscal imbalance.
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