Fitch Rates Pennsylvania's $600MM GO Bonds 'AA'

Business Wire, Nov 23, 2005

NEW YORK -- Fitch Ratings assigns an 'AA' rating to the Commonwealth of Pennsylvania's $600 million general obligation (GO) bonds, second series of 2005, due Jan. 1, 2007-2026. The bonds are for bids on Nov. 29 and are callable on or after Jan. 1, 2016. Fitch also affirms the 'AA' rating for the commonwealth's $6.8 billion outstanding GO bonds.

Pennsylvania has long maintained debt at a level that does not overburden its resources. Nearly 80% of debt is GO, amortization is rapid, and debt ratios remain modest at $768 per capita and 2.4% of personal income. GO debt will rise as $625 million of environmental bonds and $890 million of economic stimulus bonds are issued, inclusive of this issue. Also, the newly created Commonwealth Financing Authority is authorized to issue $1.14 billion of appropriation bonds for economic stimulus, including its first issue of $187.5 million, which sold last week. While planned issuance is significant and appropriation debt is a departure from practice, the commonwealth's policy of limiting debt service to around 4% of revenues, along with the annual $250 million issuance cap on appropriation bonds, should keep debt obligations moderate.

Pennsylvania's economy has begun to grow again, even as it continues to rapidly shed manufacturing jobs. Manufacturing employment accounted for 20% of jobs in 1990, 15% in 2000, and less than 12% today. Manufacturing losses during this decade have been especially steep and October 2005 manufacturing employment is down 183,000 (or 21.2%) from October 2000. However, over that same period, Pennsylvania's total employment grew 30,600 (or 0.5%) as manufacturing losses were offset by 106,200 new jobs in health and educational services, 43,000 jobs in professional and business services, and 41,500 jobs in leisure and tourism.

October 2005 employment was up 1.1% from the previous October and included strong growth in service sectors, while manufacturing declined 1.9%. Transportation equipment manufacturing, at 43,200 jobs, is less significant than in neighboring states to the west; however, on Monday General Motors Corp. announced that in 2007 it will close a metal fabricating plant in Pittsburgh that, according to GM's website, employs 613. Personal income growth has nearly approximated the nation's over the past three years. Per capita personal income in 2004 was $33,257, or 100.7% of the U.S. level, ranking 18th among the states.

The economic slowdown was reflected in financial operations during fiscal years 2002 and 2003. Revenue collections well below estimates forced balancing measures such as liquidation of the reserve, spending freezes, and tax increases. A large funding gap for fiscal 2004 was closed through spending reductions and tax increases, including a rise in the personal income tax rate. Fiscal 2004 collections ultimately were $636 million over estimates, affording a $190 million transfer to reserves and a closing balance of $76 million. Fiscal 2005 revenues were again over estimates, and following a $64 million transfer to the reserve, a $364.8 million balance was carried over. The $25.2 billion fiscal 2006 budget, which estimated only a 2.8% increase in revenues, is funded in part by drawing down the previous year's balance. Through October, year-to-date fiscal 2006 revenue collections are $104.4 million, or 1.4% over those estimates.

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