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S&P downgrades Pa.'s credit rating due to unresolved revenue plan

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After missing payments tied to Medicaid reimbursements and the state's share of pension obligations to school districts, Pennsylvania's credit rating took a hit today.

Citing an unresolved revenue plan to close a roughly $2.3 billion hole in the 2017-18 budget — a fight that has persisted since June between House Republicans and the GOP-led Senate, who has sided with Gov. Tom Wolf on recurring revenue needs — S&P Global Ratings has lowered its general obligation rating on the commonwealth to A+ from AA-.

"The downgrade largely reflects the commonwealth's chronic structural imbalance dating back nearly a decade, a history of late budget adoption and our opinion that this pattern could continue," said S&P Global Ratings credit analyst Carol Spain.

It also reflects the weakening of Pennsylvania's liquidity position, notably the delay or non-payment of scheduled expenditures for the first time in the commonwealth's history, according to S&P.

"Measured on an annual basis," added Spain, "the commonwealth's structural deficit remains manageable, but its reliance on one-time revenues has stressed its available cash, making internal resources insufficient to timely meet certain obligations."

The House Republican revenue bill, which passed by a 103-91 vote last week, would cover Pennsylvania's budget hole through a variety of measures that do not involve raising taxes.

The House plan — developed largely by rank-and-file Republicans, including several midstate lawmakers — relies on $630 million in special fund transfers from state funds with excess or dormant monies.

The budget bill also seeks a $1 billion lump-sum payment by selling rights to a portion of the state's tobacco settlement fund, which currently receives about $350 million per year. 

In addition, House Republicans want to move about $400 million in so-called lapsed funds, or funds not spent in prior budgets, from various agencies. And they are seeking $225 million from an expansion of casino gambling.

Other smaller transfers also are part of the budget plan, including $20 million from legislative reserve accounts and $50 million from the Pennsylvania Liquor Control Board.

The Senate has not yet taken action on the plan, while the state treasurer and auditor general have refused additional lending to the general fund.

In July, the Senate passed a revenue plan that included a severance tax, heavy borrowing against future revenue, increased utility taxes and expanded casino gambling. But the House has opposed the tax increases.

In response to the downgrade today, Wolf called for swift action to complete the state budget.

"For months, I have warned that a credit downgrade was looming," the governor said in a statement.

"I have said repeatedly for three years that we must responsibly fund the budget with recurring revenues. My budget proposal was balanced, cut more than $2 billion in expenditures and consolidated agencies, while also fixing the deficit.

"The Senate understood the need for urgency and acted responsibly in July to fully fund the budget and enact recurring revenues to eliminate the deficit, and my administration has tried for weeks to hold off a downgrade.

"We must reach an immediate resolution to the budget and today's news should be a wake-up call to come together and end this now. If an agreement has not progressed by next week, I will be forced to take further steps to manage this situation."

House leaders suggested the downgrade could help bring lawmakers together to address major cost drivers in the state budget.

"Pennsylvanians are paying taxes and it is very disappointing commonwealth budget costs will increase thanks to a small group of unknown people at Standard & Poor’s who make decisions based on interviews with a governor and press releases from the state's fiscal officers," Republican leaders said in a joint statement. "When those in charge of the checkbook – the same fiscal officers who approved the deficit spending last fiscal year – very publicly refuse to pay bills, even as bank accounts hold billions, of course our credit rating will take a hit.

"This rating agency for years cited the public pension system as a top reason for concern, and this year a bipartisan pension reform plan passed the legislature and is now law – a plan that is fully actuarially sound and will save the commonwealth billions over the next 30 years."

The House GOP said the focus needs to be on tackling entitlement programs and corrections costs. 

"As the Senate still has the option to concur in the House-passed fiscal code, the House, Senate and administration are working together to finalize the necessary components needed to support this year's budget," the leaders said. "In light of the downgrade, we believe it would be beneficial for quick agreement and concurrence in special fund transfers to help the treasurer expedite cash flow while we work on the remainder of the budget-related bills."

Senate GOP leaders responded by saying compromise must happen immediately and that they are standing behind the July budget package.

"In reaching a final resolution, the budget must be balanced for this year and next," leaders said in a statement. "We need to plan responsibly today for a better tomorrow, understanding the far-reaching importance of the tough decisions that we have to make now.

"The significance of this downgrade is something that we grasp and is part of why the Senate worked to finalize a responsible budget package in July. We agree with S&P's concerns about the need for stability in our financial plans to address the ongoing structural deficit."

House Democratic Leader Frank Dermody of Allegheny County called today's news a blow to the state's fiscal standing, but also an opportunity for everyone to get back to work on a "real budget solution."

Wolf has said he expects there will be a compromise before the end of the month.

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Jason Scott

Jason Scott

Jason Scott covers state government, real estate and construction, media and marketing, and Dauphin County. Have a tip or question for him? Email him at Follow him on Twitter, @JScottJournal. Circle Jason Scott on .

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Rugerno1fan September 21, 2017 11:11 am

Where does that place us relative to other states?

David September 21, 2017 8:40 am

Governor Wolf is just another obstructionist Democrat who never had any intentions of working with the Republicans to lower taxes. He will take Pennsylvania even deeper in debt right like the colossal mess the Democratic governor of California did.

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epmark September 20, 2017 2:30 pm

I'm disgusted that Pennsylvania seems to be in a race to the bottom, for no good reason other than politics (including gerrymandering). If the legislature knew how to spell ACCOUNTABILITY, we would not be in this "race". The budget (last time I checked includes revenues and expenses) was not completed on July 1 as required by law, and we all lose. Hopefully sometime before we get to #51 (taking the place of Puerto Rico at the bottom), they'll get their act together (but I doubt it).