Once cash-strapped, Pennsylvania’s rating outlook has been raised to positive by Moody’s Investors Service, indicating a possible upgrade after the Keystone State bolstered its reserves.
(Bloomberg) — Once cash-strapped, Pennsylvania’s rating outlook has been raised to positive by Moody’s Investors Service, indicating a possible upgrade after the Keystone State bolstered its reserves.
“Pennsylvania’s positive outlook is based on the significant increase in budget reserves over the past three fiscal years to levels consistent with higher-rated peers,” wrote Baye Larsen, lead analyst for state ratings at Moody’s, in a report evaluating the credit on Friday. “We expect that core rainy day reserves will remain near current levels due to sound budget management and continued steady revenue growth.”
Like other states around the country, Pennsylvania had stashed away cash when tax revenues boomed in recent years. During the last budget cycle, Treasurer Stacy Garrity deposited $2.1 billion into the state’s rainy day fund and the balance is about $5.2 billion as of Sunday, according to a Treasury spokesperson.
The state is scheduled to transfer more money into the fund by the end of September, though the specific amount is still undetermined pending a decision by lawmakers.
That’s a far cry from the state’s fiscal picture just a few years ago. When former Governor Tom Wolf took office in 2015, the state was operating with a multi-billion dollar budget deficit and the rainy day fund had fallen to about $232,000.
“Moody’s upward revision for Pennsylvania is great news, and it reflects the fact that our state reserves are the strongest they’ve been in decades,” Garrity said in an emailed statement. “The economy continues to be volatile, which is why I advocated for big increases to the Rainy Day Fund – and why it’s critical that we keep a tight rein on state spending moving forward.”
The fund, formally known as the Budget Stabilization Reserve Fund, serves as a safety net for state spending, alleviating the pressure for lawmakers to raise taxes and cut programs during an economic downturn. Pennsylvania’s reserve holds about 42 days worth of state expenditures, according to Garrity’s office.
Related: American States Once Awash in Cash Now Face Reversal of Fortunes
Earlier this year, Garrity warned that Pennsylvania will soon “face a fiscal cliff,” a reality that is already playing out in an number of other states as revenues come down from an post-pandemic high. Still, Moody’s decision to boost the outlook on the state’s debt while affirming its Aa3 rating — the fourth-highest grade available — is being rewarded by investors.
The yield penalty investors require on 10-year Pennsylvania general obligation bonds is about 21 basis points more than top-rated securities, according to data compiled by Bloomberg. That is below the five-year average spread and tighter than states like New Jersey, Illinois and even top-rated Texas, the data showed.
“The outlook change gives credit to the Commonwealth for significant improvement in financial positions,” said Alice Cheng, vice president at Janney Montgomery Scott.
While the state’s economic recovery has historically been slower than other states, it has experienced double-digit growth in various revenue streams since the pandemic, she said.
“Such growth, if sustained, will provide the Commonwealth more financial flexibility,” Cheng said.
–With assistance from Skylar Woodhouse.
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