Fitch Affirms PA Commonwealth Financing Authority's $330MM Revenue Bonds at 'AA'; Outlook Negative

NEW YORK--()--Fitch Ratings has assigned an 'AA' rating to the following Pennsylvania Commonwealth Financing Authority (CFA) bonds:

--$75 million CFA revenue bonds (federally taxable) series A-1 of 2013;
--$48 million CFA revenue bonds (tax-exempt) series A-2 of 2013;
--$207 million CFA revenue bonds (tax-exempt) series B of 2013.

The bonds are expected to be offered through negotiation the week of Jan. 7, 2013.

In addition, Fitch has affirmed the 'AA' rating on outstanding commonwealth appropriation-backed CFA revenue bonds.

The Rating Outlook remains Negative, reflecting the Negative Outlook on Pennsylvania's general obligation (GO) and GO-linked debt.

SECURITY

The bonds are secured by payments made by the commonwealth of Pennsylvania pursuant to a service agreement between the Authority and the commonwealth, subject to annual appropriation by the Pennsylvania General Assembly.

KEY RATING DRIVERS

APPROPRIATION SECURITY: Bond payments require annual legislative appropriation, resulting in a rating one notch below Pennsylvania's 'AA+' GO rating.

PENNSYLVANIA GO RATING: The commonwealth's 'AA+' GO rating reflects its lower moderate debt burden, sound economic profile, and efforts to return the budget to structural balance. The Negative Outlook reflects Fitch's concern about the expected significant growth in annual pension funding obligations in the coming fiscal years at a time when the commonwealth's financial flexibility remains limited.

WHAT COULD TRIGGER A RATING ACTION

A change in the commonwealth of Pennsylvania's GO rating, upon which this rating is based. Maintenance of the commonwealth's 'AA+' rating will depend on the ability to moderate, through sustainable measures, the increasing demands that pension obligations are placing on the budget while continuing a commitment to fiscal balance and replenishing reserves.

CREDIT PROFILE

The 'AA' rating on the CFA revenue bonds reflects the credit of the commonwealth (GOs rated 'AA+' with a Negative Outlook) and covenants to seek state appropriations. The bonds are special obligations of the CFA, which was created in 2004 to stimulate and diversify the state's economy through the use of appropriation-backed debt. Debt service is derived from payments from the commonwealth to the CFA under a service agreement, subject to appropriation. The secretary of the Department of Community and Economic Development (DCED) and the secretary of the budget have covenanted to seek such appropriations. The CFA is staffed through DCED and is governed by a seven-member board including both executive and legislative appointees.

While the initial CFA authorization was exhausted in 2008, the CFA was granted additional bonding authority for up to $1.3 billion in new debt: $500 million for alternative energy projects and $800 million for water, sewer, storm water, and flood control projects. The series 2013A bonds are being issued under the alternative energy authorization, and the 2013B bonds are being issued under the water authorization.

Pennsylvania's 'AA+' GO rating reflects its lower moderate debt burden, sound economic profile, and efforts to return the budget to structural balance. The Negative Outlook reflects Fitch's concern about the expected significant growth in annual pension funding obligations in the coming fiscal years at a time when the commonwealth's financial flexibility remains limited, as reserves have been depleted and budget balancing to date already has required significant fiscal austerity. Fitch notes that progress towards restoring structural budget balance was made with the enacted budget for fiscal 2013 and modest reserve replenishment is expected. However, the current pension funding schedule requires large increased contributions in each of the coming fiscal years that would absorb much of projected revenue growth, and even with these increases funding would remain below actuarially required levels.

Through December 2012, fiscal 2013 general fund revenues are $172 million above budget estimates. Significant overperformance in corporation tax revenue and a slight positive variance in personal income tax receipts are offsetting underperformance in sales tax revenue. The governor's budget proposal for fiscal 2014, which begins on July 1, is expected to be released early next month.

For more information on the commonwealth of Pennsylvania's general credit, see Fitch Research 'Fitch Rates Pennsylvania's $361MM GOs 'AA+'; Outlook Remains Negative' dated July 19, 2012 and available at www.fitchratings.com.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

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Contacts

Fitch Ratings
Primary Analyst:
Laura Porter, +1-212-908-0575
Managing Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Kenneth T. Weinstein, +1-212-908-0571
Senior Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Laura Porter, +1-212-908-0575
Managing Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Kenneth T. Weinstein, +1-212-908-0571
Senior Director
or
Committee Chairperson:
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com