Fitch upgrades Pennsylvania to AA citing record reserve buildup

BY SourceMedia | MUNICIPAL | 11/28/23 09:47 AM EST By Chip Barnett

Fitch Ratings has upgraded Pennsylvania's issuer default and outstanding general obligation bond ratings to AA from AA-minus.

Fitch also raised the bonds supported by state appropriations to AA-minus from A-plus and the ratings on state school credit enhancement programs linked to the commonwealth's IDR to AA-minus from A-plus. The rating outlook on all the bonds is stable, Fitch said late Monday.

"The upgrade of Pennsylvania's IDR and related ratings reflects recent use of revenue surpluses to build its reserves to historical highs and Fitch's expectation that substantial reserves will be maintained in the near term, despite a political impasse that has delayed implementation of some items in the 2024 budget," Fitch said.

"Fitch Ratings becomes the third credit rating agency since September to affirm that our Commonwealth is on sound financial footing thanks to our commonsense investments and responsible budgetary practices," Gov. Josh Shapiro said.

"The AA IDR reflects Fitch's assessment of improved operating performance, as well as a low long-term liability burden and broad flexibility to manage spending pressures, which offset modest baseline revenue growth and a historically contentious decision-making environment," the agency said.

Separately, Fitch assigned AA ratings to the state's $1.335 billion of first series of 2023 GOs and $787.165 million of first refunding series of 2023 GOs, which are slated to sell competitively on Dec. 6.

New money proceeds will be used for various capital projects. The GOs are direct and general obligations of Pennsylvania, which has pledged its full faith and credit.

Fitch also upgraded bonds supported by state appropriations and linked to the commonwealth's IDR and carry the same stable rating outlook.

Some of the other issuers Fitch upgraded included:

  • Pennsylvania Commonwealth Financing Authority appropriation-backed debt to AA-minus from A-plus;
  • Pennsylvania Economic Development Financing Authority revenue bonds for the Convention Center Project to AA-minus from A-plus;
  • Pennsylvania School Credit Enhancement Intercept Program's State School Bond Program Rating, or Intercept Program, Section 633 to AA-minus from A-plus;
  • Pennsylvania State Public School Building Authority, State Building Authority Intercept, Pennsylvania State Public School Building Authority, 785(a) to AA-minus from A-plus; and
  • Pennsylvania School Credit Enhancement Direct Pay Intercept Program, State School Bond Program Rating, Direct Pay Intercept Program, Pennsylvania State Public School Building Authority Direct Pay, 785(b) to AA-minus from A-plus.

In September, S&P Global Ratings raised Pennsylvania's outlook to positive from stable and affirmed its A-plus long-term rating on the state's $10.7 billion of outstanding general obligation bonds.

S&P said its positive outlook reflects "our view that Pennsylvania has continued to make progress toward structural budgetary balance, with positive operating results in five of the past six years, leading to stronger reserves that are better aligned with state policies."

S&P affirmed the rating and positive outlook Tuesday.

Also in September, Moody's Investors Service (MCO) revised its outlook on Pennsylvania to positive from stable and affirmed the state's Aa3 issuer and GO ratings. Moody's affirmed them Monday.

Additionally, Moody's assigns the state A1 and A2 ratings on outstanding appropriation backed debt, A1 on the Pennsylvania School District Intercept Program and the A2 on the Pennsylvania General Municipal Pension System State Aid Program.

"My administration will continue to work with leaders in both parties to make smart investments that responsibly manage taxpayer funds while strengthening Pennsylvania schools and businesses, creating safer communities and supporting our law enforcement and first responders, as we build an economy that works for all," Shapiro said.

"With our third positive affirmation in the last three months that Pennsylvania is on the path for economic and financial success, it's clear that our responsible investments are working to keep the Commonwealth on a sound fiscal trajectory," said Uri Monson, state secretary of the budget.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.