OREANDA-NEWS. Pennsylvania's budget impasse does not pose a threat to the ratings on the commonwealth's outstanding debt, according to Fitch Ratings.

On Wednesday Aug. 19, the commonwealth of Pennsylvania entered its eighth week of fiscal year 2016 without a budget. Fitch remains focused on the outcome of budget negotiations, rather than the current impasse. Tax changes, pension reforms, liquor store privatization, and school funding are key issues holding up a budget resolution between the Democratic governor and Republican legislative leadership. The state constitution requires Pennsylvania's general obligation (GO) bonds be paid in the absence of a budget. Fitch's 'AA-' GO rating with a Stable Outlook on Pennsylvania incorporates our expectation the commonwealth will also ensure, even without a budget, timely debt service payments on bonds normally paid from appropriations. Further, Fitch expects Pennsylvania to support other governmental entities, including local school districts, reliant on commonwealth transfers to pay debt service.

Pennsylvania faces fiscal pressures in the form of a structurally unbalanced budget, depleted reserves, and a rapidly growing pension contribution burden following years of contribution underfunding and market-driven investment declines. The 'AA-' rating, below the level of most states, reflects those issues, as well as Fitch's expectation that the commonwealth will respond to those pressures adequately, while also beginning to make progress toward structural budgetary balance. Pennsylvania benefits from a large, diversified and expanding, albeit slowly, economic base and moderate tax burden which provides some capacity to match expenditure growth.

Fitch's emphasis will be on details of a final fiscal 2016 budget, including the extent to which it makes progress in reducing Pennsylvania's structural budget gap. The impasse itself does not affect Fitch's view of the commonwealth's credit quality. Despite the lack of a budget, Pennsylvania continues to collect tax and fee revenues and state government is operating in a normal manner for residents with no major service disruptions to date. The state continues to pay employees and make pension contributions and distributions. Certain essential services such as corrections are fully funded.

Fitch believes the commonwealth remains committed to ensuring debt service on all debt normally paid from state appropriations is paid timely with or without a budget. States generally retain substantial budgetary flexibility allowing them to address such situations. Fitch anticipates the commonwealth will consider various options to ensure timely payments including accessing revenues available without an annual appropriation or utilizing debt service reserve funds. Fitch views Pennsylvania's efforts as reflective of its strong commitment to bondholders.

Fitch also does not view the budget impasse as a threat to the ratings on Pennsylvania's school credit enhancement programs (direct-pay intercept and pre-default intercept, both rated 'A+' with a Stable Outlook). The first substantial state school aid payment is typically paid the last Thursday of August (Aug. 27 this year). Without a budget, the payment will not be made and there will be no state aid to be intercepted. But the commonwealth has already engaged with participating at-risk school districts such as the Philadelphia School District (underyling GO rating of 'BB-' with a Negative Outlook) and Chester Upland School District (not rated by Fitch) to ensure debt service payments on enhanced bonds will be made. Measures in support of schools include assisting school districts in securing lines of credit collateralized with future state aid payments.