Pennsylvania slipped closer to a rating downgrade Thursday, when Standard & Poor's placed its AA-minus general obligation rating on credit watch with negative implications, citing the nine-month impasse over the fiscal 2016 budget.
Democratic Gov. Tom Wolf and the Republican-controlled legislature continue to spar over a tax-and-revenue package to fund the roughly $30 billion spending plan for the fiscal year that began last July 1.
Wolf in late December approved three-fourths of that budget to free up funds for school districts and social service agencies, while holding out for increased basic education aid.
S&P's move is the first of what could be multiple rating actions this year against Pennsylvania.
The commonwealth has received five downgrades in the past five years and in 2014, all three major bond rating agencies lowered its GO bonds, citing budget imbalance and an unfunded pension liability now estimated at about $63 billion.
"Although the budget impasse clearly signals a breakdown in the fiscal policymaking process, we are not lowering our rating at this time because it has not significantly impaired the state's ability or willingness to make debt payments," Standard & Poor's analyst Carol Spain said Thursday.
Moody's Investors Service rates Pennsylvania's GO bonds Aa3, while Fitch Ratings also assigns its AA-minus rating.
S&P also placed its A-plus appropriation rating, its departmental appropriation rating of A, and its A-minus moral obligation rating for Pennsylvania debt on credit watch negative.
"I think the negative watch is appropriate," said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia. "It's certainly not the worst example of financial malfeasance, but in Pennsylvania it certainly ranks very high.
"Of course there is no problem with GO debt service payments, but there have been problems with other issuers for which the state has some financial responsibility such as school districts."
Moody's last month downgraded three struggling Pennsylvania school districts and withdrew their enhanced ratings based on the commonwealth's pre-default intercept programs.
It lowered the pre-default enhanced ratings of Chester Upland to Ba2 from Baa1, Duquesne City to Ba2 from Baa1, and Steelton Highspire to B1 from Baa1 and assigned negative outlooks.
Wolf last month presented his $32 billion fiscal 2017 budget to lawmakers, urging them to close a $2 billion deficit to prevent further downgrades.
"A few months of impasse can be viewed as typical political jostling, but this extended deadlock makes one wonder how the state will ever be able to deal with the bigger fiscal issues they face such as pension funding," Schankel added.
The governor's proposal, while balanced, relies on passage of a bipartisan compromise bill that stalled in the legislature in December.
"The administration is hopeful that the legislature will agree on the compromise plan by the end of March, but given the state's political climate and deep divide as to how to address its fiscal issues, we are increasingly skeptical that the compromise legislation will pass," said Spain.
