State’s credit downgrade will hit Pennsylvania taxpayers at local level, too

The Commonwealth’s downgrade also affects ratings of affiliated state agencies more directly involved in municipalities’ finances.

 

Pennsylvania’s recent credit downgrade likey will boost borrowing costs for school districts – and have indirect effects on cities and other local public agencies that some experts predict will be significant.Moody’s Investor’s Service announced last week that it would downgrade the Commonwealth’s $11.1 billion of general obligation debt from Aa2 to Aa3 – lower than 41 of 47 states with GO debt.The lower the rating, the riskier (i.e., more likely to default) the borrower seems to lenders. So the downgrade means higher interest rates on new debt issues – as well as refinancings – by the Commonwealth and affiliate agencies.In terms of impacts on local governments, their credit ratings won’t take a hit simply because the Commonwealth’s did, since local governments’ ratings consider their own risk based on budget, outstanding obligations and repayment history.The downgrade will, however, further stress the Commonwealth’s resources, and that means money will be diverted from other places .Cities hoping for Community Reinvestment & Improvement Zone (CRIZ) designations, for example, might find the state awards fewer of them.Or none at all, if the state cannot afford to give up the revenue from taxes that would be forgiven through the CRIZ program.The downgrade also will make it more expensive to do road and construction projects typically financed partially by the state, according to Auditor General Eugene DePasquale.DePasquale says that will hit school districts hardest.”Any time there’s a partnership on a capital project, it would affect a local government because it will be more expensive to do the project,” Pasquale says. “The state also is much more involved in financing school … building upgrades or even building a new school, so the bond rating downgrade for the state is going to have a major impact on school districts.”Schools have received state assistance in financing capital projects so frequently, for so long, that it created the Pennsylvania State Public School Building Authority, which Moody’s dropped two notches to Aa3 along with its Commonwealth downgrade.Pennsylvania state’s school intercept programs, created to allow school districts to divert funding to cover debt service, also were downgraded.When public agencies that aren’t school districts – municipalities’ local water and sewer authorities, for example – seek debt guarantees to obtain a lower interest rate from state entities, even the Commonwealth itself cannot be a guarantor.In addition to the school authorities, Moody’s also listed the Pennsylvania Turnpike Commission, Pennsylvania Economic Development Financing Authority, Commonwealth Financing Authority, Philadelphia Regional Port Authority, and Sports & Exhibition Authority of Pittsburgh & Allegheny as issuers that will be downgraded along with the Commonwealth.

Officials with the state Department of Economic & Community Development, which includes PEDFA and runs CRIZ and other economic development programs, say they’re not yet sure how the change will affect local public agencies.

DCED spokeswoman Heidi Havens says no major impacts are anticipated, but that “it’s complex and we’re still looking into it.”

State Treasury Spokesman Gary Tuma says the latest downgrade’s impacts will vary and won’t be clear until individual entities try to borrow or partner with the state to finance capital projects.

“Overall commonwealth creditworthiness may be factored in, but it’s difficult to quantify the impact when each entity also has its own particular set of circumstances,” Tuma says.

Moody’s downgrade was the third since 2012, and came after all three primary credit ratings agencies – Standard & Poor’s and Fitch Ratings are the others – warned they’d drop Pennsylvania’s rating if lawmakers didn’t address the state’s pension problems as well as stop using one-time fixes to balance its budget.

 Editor’s note: This story has been updated to add a comment from State Treasury spokesman Gary Tuma.