PA Budget Stalemate Leads To "Negative Outlook"

Oct 19, 2015

One of the nation's largest rating agencies believes the budget stalemate could eventually have a negative impact on Pennsylvania's financial stability.
Credit StockMonkeys.com / www.stockmonkeys.com

Moody’s Investors Service last week maintained Pennsylvania’s bond rating at Aa3 but revised its outlook to "negative" from stable  on the state's general obligation debt.

Moody’s cited the budget stalemate for the downgrade. Pennsylvania is now 110 days late in passing a budget for fiscal year 2016.   The downgrade affects 10.9 billion in bonds. The stalemate has led investors to demand higher yields to hold the state’s bonds – a move that could eventually cost taxpayers money if the interest rates are increased.

Nick Samuels, Vice President and Senior Credit Officer at Moody’s said while other states have been late on their budgets, Pennsylvania has special considerations and outstanding unresolved issues.

“What compounds the issue now is the size of Pennsylvania’s structural budget gap, ongoing expenditures exceed ongoing revenues by at least 2 billion and the political impasse in Harrisburg now really makes it finding solutions to those issues much more difficult,” he said.

Steve Herzenberg ,the Director of the left-leaning Pennsylvania Budget and Policy Center, says the Moody’s downgrade is yet another warning sign that Pennsylvania needs to get its budget house in order. While the state’s bond rating is still far above junk bond status, Herzenberg says this downgrade could move Pennsylvania into deeper debt and higher costs.

“At the end of the day, when you mismanage your finances, taxpayers end up having to spend tens of millions more for the same levels of services,” he said. 

According to Moody's, the negative outlook could be removed if:

  • the state increases revenues or trims expenditures to close the budget gap
  • the state increases pension funding levels
  • there is faster than expected economic growth