Fitch Ratings assigns an 'AA' rating to the following Commonwealth Financing Authority (PA) revenue bonds:
--$62 million Series A of 2010 (Federally Taxable);
--$80 million Series B of 2010.
In addition, Fitch affirms the 'AA' rating on the Authority's outstanding revenue bonds.
The Rating Outlook is Stable.
The bonds are expected to sell via negotiation on April 13.
On April 5, 2010, Fitch recalibrated its U.S. public finance credit ratings for states as well as the District of Columbia, New York City, and the Commonwealth of Puerto Rico; the above rating(s) reflect this recalibration. Fitch announced the recalibration in the 'Recalibration of U.S. Public Finance Ratings' special report, which was published on March 25, 2010 and is available at 'fitchratings.com' under the following headers: Sectors >> Public Finance >> U.S. Public Finance >> Research.
For more detail on the rating adjustments, please see the March 25, 2010 report. Fitch will revise the remaining tax-supported ratings along with water and sewer, public power distribution-only, and public higher education ratings April 30, 2010, as detailed in the March 25, 2010 report.
RATING RATIONALE:
--The 'AA' ratings reflect the solid credit fundamentals of the commonwealth of Pennsylvania (GO bonds rated 'AA+' by Fitch).
--Debt service payments are subject to annual legislative appropriation by the Pennsylvania General Assembly.
--The commonwealth's Department of Community and Economic Development (DCED), acting on behalf of the Commonwealth Financing Authority (CFA, or the authority) and the commonwealth's secretary of the budget, has covenanted to seek state annual appropriations as long as bonds remain outstanding.
--Broad support exists for the authority's programs, although Fitch recognizes that such support may wane.
--The commonwealth does not have a long history of appropriation debt.
KEY RATING DRIVER(S):
General credit characteristics of the commonwealth, whose appropriations support the debt service of CFA obligations.
SECURITY:
The bonds shall be payable from and secured by a lien upon and pledge of revenues payable to Authority pursuant to the Service Agreement between the Authority and the commonwealth, subject to appropriation.
CREDIT SUMMARY:
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 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 second against the latter authorization, and approximately $658 million in CFA authorization remains after this sale.
The Commonwealth's 'AA+' GO 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 more than $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, was balanced with the use of federal stimulus monies, various reserve draws and other one-time items, and limited new revenue measures. Revenue weakness through March 2010 has reopened a gap. Longer-term challenges include meeting pension contributions 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 fiscal 2010 budget adoption was delayed until October, with certain items not resolved until just recently, the budget is now in place. The budget addressed the prior year's deficit and was balanced with the use of $3.4 billion in federal stimulus monies, various reserve draws and other one-time items (inclusive of exhausting the state's revenue stabilization reserve) totaling $2.4 billion, and new revenue measures totaling approximately $900 million. However, through March 2010, revenue performance is lagging estimated levels by approximately $720 million, roughly $200 million more than the revenue shortfall estimate of $525 million made upon the introduction in February 2010 of the Executive Budget for fiscal 2011. Balance is expected to be maintained through the application of up to $275 million unanticipated federal monies related to Medicare Part D, $135 million in cuts under Governor's jurisdiction, $60 million from prior year lapses, and the balance to be drawn from the projected ending balance, leaving the General Fund with approximately $37 million. Despite the aforementioned reserve draws, the state's access to approximately $500 million across other state funds leaves the commonwealth's total flexibility at a modest 2% of fiscal 2010 revenues, down from an expected 4.7% cushion prior to budget adoption. The proposed Executive Budget for fiscal 2011 anticipates general fund revenues will decline 3% while spending will grow by 4%, with the difference largely supported by federal stimulus monies. Also proposed are a series of tax measures expected to generate approximately $874 million in new revenue to be reserved for use in fiscal 2012 following exhaustion of federal stimulus support.
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. Employment in 2008 was essentially flat at 0.1% growth, and a 3.3% decline was recorded for 2009. As of February 2010, employment declined by 2.4% when compared with the previous year's level, slightly less severe than the national decline of 2.5% over the same period. Pennsylvania's unemployment rate as of February 2010 was 8.9%, 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 and the preliminary figure for 2009 indicates that Pennsylvania's decline was less severe than the national decline. Per capita personal income, which has been at or near par with the nation for decades, for 2009 is estimated at $39,578, equaling 101.1% of the U.S. level and ranking 18th 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 $910 per capita and 2.3% of preliminary 2009 personal income. Debt levels are expected to rise in the coming years with significant issuance but remain in the moderate range. Pennsylvania's pension systems are generally well funded, though funded ratios have been stronger in years past. Sharp jumps in required contributions are expected beginning in fiscal 2013, and the governor has proposed measures which will mitigate the expected increases through re-amortizing accrued liabilities over a 30-year period. Fitch will continue to monitor developments on this front.
Applicable criteria available on Fitch's website at 'www.fitchratings.com' includes:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009.
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
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