Fitch Ratings has assigned an 'AA-' ratings to Pennsylvania Commonwealth Financing Authority's (CFA) $64.8 million tax exempt revenue bonds, series C of 2009 and $335.2 million revenue bonds, series D of 2009 (federally taxable-Build America Bonds) which are expected to be sold through negotiation on Nov. 4, 2009. Additionally, Fitch affirms approximately $791.5 million in outstanding CFA bonds at 'AA-'. The Rating Outlook is Stable. Simultaneously, Fitch affirms the 'AA' rating and Stable Outlook on the Commonwealth's approximately $8.7 billion in outstanding general obligation (GO) bonds.
The 'AA-' rating reflects the solid credit of the Commonwealth of Pennsylvania (GOs rated 'AA' by Fitch) and the covenants to seek state appropriations. The bonds are special obligations of the CFA, which was created in 2004 to stimulate and diversify the state's economy through the use of appropriation-backed debt. The bonds are payable from payments from the Commonwealth to the CFA under a service contract, subject to appropriation. The secretary of the Department of Community and Economic Development (DCED) and the secretary of the budget have covenanted to seek such an appropriation. Should passage of the budget be late, the budget secretary covenants to use her best efforts to include the appropriation in a supplemental budget. The CFA is staffed through DCED and is governed by a seven-member board including both executive and legislative appointees. While the initial CFA authorization was exhausted in 2008, the CFA had been granted in July 2008 additional bonding authority for up to $1.3 billion in new debt inclusive of $500 million for alterative energy projects and $800 million for water, sewer, storm water, and flood control projects. The bonds being issued now will be the first against the latter authorization.
The Commonwealth's 'AA' rating and Stable Outlook reflect the lower moderate debt burden, a diversifying economy, and a history of conservative financial operations, which are currently tempered by significant revenue weakness and aging demographics. Following a difficult period earlier in the decade, Pennsylvania's finances had improved, achieving budgetary surplus in fiscal years 2004 through 2008. Revenue performance for fiscal 2009 was over $3.2 billion below original expectations and Pennsylvania carried a negative ending balance of over $2.7 billion into fiscal 2010. Following a protracted delay, the fiscal 2010 budget, which addressed the prior year's deficit, is now largely in place and balanced with the use of federal stimulus monies, various reserve draws and other one-time items, and limited new revenue measures. Longer term challenges include meeting pension obligations that are scheduled to increase significantly in fiscal 2013.
Pennsylvania's fiscal 2009 budget anticipated general fund revenue growth of 3.1%; however, actual revenues were 11.3% below estimates and 8.6% below fiscal 2008 levels. Due to this underperformance, Pennsylvania ended fiscal 2009 with a negative ending balance of over $2.7 billion. While adoption was delayed until earlier this month, the fiscal 2010 budget is largely in place. The budget addressed the prior year's deficit and is balanced with the use of $3.4 billion in federal stimulus monies, various reserve draws and other one-time items (inclusive of a full withdrawal from the state's revenue stabilization reserve) totaling $2.4 billion, and new revenue measures totaling approximately $900 million. Projected fiscal 2010 general fund tax revenues represent 2.9% growth over fiscal 2009, and general fund spending, inclusive of federal stimulus monies, is approximately $524 million below the fiscal 2009 budget. However, Fitch notes that through September 2009, revenue performance is lagging estimated levels by approximately $140 million. Assuming resolution of the outstanding spending and revenue measures, totaling approximately $700 million and $200 million, respectively, Pennsylvania expects to close with an ending balance of $354 million. Despite the aforementioned reserve draws, the state's access to approximately $455 million across other state funds brings the commonwealth's total flexibility totals a modest 2.9% of fiscal 2010 revenues, down from an expected 4.7% cushion prior to budget adoption.
Pennsylvania's economy in recent years has posted consistent annual employment growth despite continued manufacturing losses. Pennsylvania lost jobs in 2001 through 2003, and gains realized in 2004 and 2005 pushed employment ahead of the pre-recession peak. Employment growth continued in 2006 and 2007 at 0.9% and 0.7%, respectively and 2008 was essentially flat at 0.1% growth. As of August 2009, employment declined by 3.3% when compared with the previous year's level, less severe than the national decline of 4.2% over the same period. Pennsylvania's unemployment as of August 2009 was 8.6%, below the national level of 9.7% for the same month. Personal income growth has lagged the nation due to very slow population growth in recent years, though the 2008 data indicates the state outperformed the nation. Per capita personal income, which has been at or near par with the nation for decades, in 2008 was $40,140, ranking 19th among the states. Pennsylvania is among the nation's oldest states, with a median age of 39.9, three years above the U.S. median level.
Debt is primarily GO and retires rapidly, with issuance well planned and limited by policy. As of June 30, 2009, debt ratios remained lower moderate at $921 per capita and 2.3% of 2008 personal income. Debt levels are expected to rise in the coming years, as an additional $1.5 billion has recently been authorized for economic stimulus and infrastructure repair in addition to the $1.3 billion in CFA authorization discussed earlier. While planned issuance is significant and the appropriation debt is a departure from practice, Pennsylvania's policy of limiting debt service to around 4% of revenues should keep debt obligations moderate. Pennsylvania's pension systems are generally well funded, though funded ratios have been stronger in years past. Sharp jumps in required contribution rates are expected for fiscal 2013, which Pennsylvania plans to address prior to that time.
Considerations for Taxable/Build America Bonds Investors:
The following sector credit profile is provided as background for investors new to the municipal market.
State Appropriation-Backed Bonds:
A U.S. state government's overall credit quality is reflected in the rating for its GO full faith and credit pledge, the broadest security that a state can provide to the repayment of its long-term borrowing. In cases where bond payment requires annual or biennial legislative appropriation, this lesser long-term commitment to repayment is reflected in a lower rating than the GO rating. Such debt is typically rated one notch below the GO rating. If concerns about non-appropriation are heightened, for example in cases where there is not clear essentiality for the project being funded, such debt can be rated two or more notches below the GO rating. Conversely, if the risk of non-appropriation is judged to be effectively eliminated, for example through a mechanism that traps substantial operating funds if appropriation is not made, the appropriation debt can be rated on par with the GO credit.
State GO ratings generally fall within the two highest rating categories of 'AAA' or 'AA', with a few outliers. The top tier ratings reflect states' inherent strengths: states generally have broad economic and tax base resources and all possess sovereign powers under a federal government system, with substantial, although varying, control over revenue raising and spending. Given these inherent strengths, in only a few instances have economic concentration and long-term structural decline or the inability or unwillingness to address large financial challenges led to ratings below the 'AA' category. For additional information on State ratings, see U.S. State General Obligation Bond Rating Criteria dated April 25, 2008.
Additional information is available at www.fitchratings.com.
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Contacts:
Fitch Ratings, New York
Kenneth T. Weinstein, 212-908-0571
Laura
Porter, 212-908-0575
or
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212-908-0526
Email: cindy.stoller@fitchratings.com
