Citing the state's four-month-old budget impasse, Moody's Investors Service downgraded Pennsylvania's pre-default intercept programs for school districts to A3 from A2.
Affected were 13 ratings, including the Philadelphia, Chester-Upland and Reading school districts. They are under review for further downgrade, Moody's said late Wednesday.
"Pennsylvania's budget stalemate once again hit the ratings of school districts," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.
Moody's cited Pennsylvania's chronically late budgets - nine of the last 11 - and "the lack of clarity surrounding the intercept program's mechanical feasibility in the absence of an approved and implemented budget."
Democratic Gov. Tom Wolf and a Republican-dominated legislature have remained far apart over how to fund a roughly $30 billion spending plan for fiscal 2016. The governor's agenda includes a severance tax on Marcellus Shale natural gas drilling to help fund educational programs and balance the commonwealth's budget.
Tax changes, school funding, pension overall and liquor store privatization are the budgetary dividing points.
School districts dependent on reimbursements from the state are especially hard-hit. According to state Auditor General Eugene DePasquale, the state Department of Education did not make its September or October payments to schools and is unlikely to do so in November.
The Philadelphia School Reform Commission, which has governed the district since 2001, approved $250 million in new borrowing on Monday for the city's schools and authorized the district to lend itself $40 million from its capital fund to keep operating through Dec. 31.
While Moody's expects the commonwealth to cover any missed debt service payments on enhanced bonds, "the current lengthy budget impasse has heightened risks to bondholders, and raises doubt about whether the pre-default mechanisms will work effectively every time without funds appropriated to districts."
The review for downgrade, said Moody's, reflects the ongoing uncertainty regarding the amount and availability of state aid for debt-service obligations given the commonwealth's prolonged budget stalemate.
"As we continue to review the underlying credit quality of school districts in Pennsylvania, we may further downgrade enhanced ratings on some of these financings, particularly on financially weak school districts," Moody's added.
In a report late last month, DePasquale said school districts statewide have had to borrow $85 million, bringing the total to date to $431 million. Interest and fees on the money borrowed, he added, could reach $14 million.
In addition to borrowing, said DePasquale, school districts, charter schools and intermediate units are spending down reserve funds. Some also are withholding payments to charter schools, postponing hiring, delaying payments to vendors, delaying staff paychecks and withholding payments to retirement funds.
The impasse is forcing some school districts and charter schools and to shorten school days or weeks, cut programs and even consider closing schools.
Pennsylvania's longest budget stalemate occurred under Gov. Ed Rendell in 2003, when the state passed a budget in December after some districts said they would not open after the holiday break.
Moody's rates Pennsylvania's general obligation bonds Aa3. Fitch Ratings and Standard & Poor's rate them AA-minus. All three downgraded the commonwealth last year, citing budget imbalance and an unfunded pension liability estimated at $53 billion.
