Pennsylvania’s state capitol in Harrisburg. Both the long delay in enacting a state budget, and the final budget itself, were factors as S&P<\/p>\n
Bloomberg News<\/p>\n
After watching Pennsylvania take more than four months to pass a structurally imbalanced budget, S&P Global Ratings lowered the outlook to stable from positive on its A-plus rating of the commonwealth.<\/p>\n
The rating agency saw more cause for uncertainty than for optimism when it surveyed the painful budget process and the budget itself.<\/p>\n
“Pennsylvania’s recent five-month budget impasse hindered the ability for state agencies to fully carry out services, pay vendors, and distribute commonwealth funding to local governments and school districts,” S&P analyst Geoff Buswick wrote in Friday’s report on the outlook change, “and inhibited the ability to nimbly respond to external pressures caused by changing federal policy and an expected economic slowdown.”<\/p>\n
A big factor in the outlook change was structural imbalance in the $50.1 billion budget<\/a>, Buswick said.\u00a0<\/p>\n Last year’s budget<\/a> spent roughly $3 billion of Pennsylvania’s general fund surplus, creating a structural gap of about 7%. The 2026 budget spends $4 billion, depleting the general fund surplus to around $200 million.\u00a0<\/p>\n When S&P assigned a positive outlook<\/a> to the commonwealth in September 2023, the agency noted the structural imbalance, Buswick said.\u00a0<\/p>\n “It was a general fund surplus, which is a real surplus, and we expect states to use it. And we thought they would be curtailing that use over time,” Buswick said. “And when this budget was finally adopted, it was actually greater usage of this one time source for the recurring revenue than happened the year before.”<\/p>\n Pennsylvania is rated Aa2 by Moody’s Ratings and AA by Fitch Ratings.\u00a0<\/p>\n S&P’s A-plus rating is “relatively low compared with other states,” Buswick wrote in the report, “and already captures the challenges Pennsylvania puts on itself with recurring late budgets.”<\/p>\n Pennsylvania has a history of budget impasses, with 13 late budgets in the last 20 years. This is the third late budget in a row. The longest impasse, in 2015, lasted nine months.\u00a0<\/p>\n The state Senate is controlled by the GOP, and the House and governor’s office by Democrats, and common ground was hard to come by.<\/p>\n Prior impasses, Buswick wrote, “temporarily affected the commonwealth’s liquidity by creating internal borrowing problems leading to short-term delays in some payments,” although they didn’t affect debt service.\u00a0<\/p>\n Mainly, impasses are a credit problem because they create uncertainty, Buswick said.\u00a0<\/p>\n “When you don’t know when the revenues may come in, or you don’t know when you’ll be able to get out that expense, if there’s an economic swing in the meantime, if there’s any type of issue, it adds to uncertainty,” Buswick said. “And the uncertainty for us typically equates to a lower credit quality.”<\/p>\n Pennsylvania has set up systems to ensure some stability when the budget is late. State employees are still paid during an impasse, and debt service is paid reliably.\u00a0<\/p>\n In 2016, the commonwealth created an aid intercept program, Act 85, to ensure that school districts don’t miss debt service payments when the state doesn’t have a budget, Buswick wrote. This year, more than 100 payments were made through the program, totaling over $150 million.\u00a0<\/p>\n Aside from isolated programs, the commonwealth does not send funds to local governments or school districts during an impasse. In total, school districts<\/a> missed $5.3 billion of payments<\/a> from the state between July and November.\u00a0<\/p>\n