Moody’s Rating for Pennsylvania No Cause for Celebration
Moody’s Investors Service recently upgraded Pennsylvania’s outlook from “stable” to “positive,” a development Gov. Josh Shapiro touted as an example of his “fiscally responsible management” of Pennsylvania’s finances.
Great news, right? Not so much, when you consider the facts.
Moody’s upgraded Pennsylvania’s outlook but did not see fit to raise its actual credit rating, mired at Aa3 since 2014. By comparison, our neighboring states of New York, Ohio, and Virginia all have higher credit ratings from both Moody’s and Standard and Poor’s (S&P).
Moody’s also stated: “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.” Moody’s is correct: Pennsylvania finally has a budget surplus and a significant balance in its rainy-day fund.
So, what’s the concern? Why not boost the credit rating?
The unaddressed issue in Moody’s outlook is that Pennsylvania’s fiscal year 2023–24 budget spends more than the revenue it brings in. If this trend continues, the result will be that the state’s budget reserves referenced by Moody’s – built up over the past three years, mainly from one-time COVID-19 federal funds – will be depleted.
“We expect that core rainy day reserves will remain near current levels due to sound budget management and continued steady revenue growth,” Moody’s said of Pennsylvania. We should demand this type of budget management as a matter of course. And yet, the execution is already lacking just nine months into the Shapiro administration.
Even worse, general fund revenues this fiscal year are already falling short of estimate by $27.2 million through August. The need to reach into state reserves may occur sooner than anticipated.
Earlier this year, for only the second time in history, the federal government’s credit rating was downgraded by Fitch. Fitch cited “a high and growing general government debt burden” and “repeated debt limit standoffs and last-minute resolutions.”
The notice was eerily similar to S&P’s downgrade of Pennsylvania in 2017, which largely owed to “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,” S&P said then.
Pennsylvania will likely see a downgrade again if it continues to add to its already-growing structural deficit, as Gov. Shapiro did this fiscal year. The warning signs are flashing.
Rather than celebrating the status quo, Gov. Shapiro should work with the legislature on budget practices that will provide for Pennsylvanians while also strengthening our credit rating. I know that we can do this together. A great place to start would be passing the Budget Reform Package and implementing zero-based budgeting, as Shapiro did in Montgomery County.
This package of bills will close the loophole that allows an out-of-balance budget to become law, ensure a balanced budget amid revenue shortfalls, and limit the authority of the budget secretary to spend un-lapsed funds.
We know from experience that protracted budget impasses – like the impasse we still face – and overspending won’t upgrade our credit. That’s why I’ll continue calling on the governor to work with us on sound budget practices and policies.