Fitch Rates PA Commonwealth Financing Auth's $199.8MM Revenue Bonds at 'A+'

Fitch Ratings has assigned an 'A+' rating to the following Pennsylvania Commonwealth Financing Authority (CFA) bonds:

--$96 million CFA revenue bonds (tax-exempt) series A of 2014;

--$96.865 million CFA revenue refunding bonds (tax-exempt) series B-1 of 2014;

--$6.94 million CFA revenue refunding bonds (federally taxable) series B-2 of 2014.

The bonds are expected to be offered through negotiation the week of Dec. 2, 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are paid from payments made by the commonwealth of Pennsylvania pursuant to service agreements 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: Pennsylvania's 'AA-' GO rating reflects the commonwealth's continued inability to address its fiscal challenges with structural and recurring measures. After an unexpected revenue shortfall in fiscal 2014, the current year budget includes a substantial amount of one-time revenue and expense items to achieve balance and continues the deferral of statutory requirements to replenish reserves which were utilized during the recession. The commonwealth's rapid growth in fixed costs, particularly the escalating pension burden, poses a key ongoing challenge, although Fitch expects budgetary planning and management to mitigate these pressures in a manner consistent with the 'AA-' rating.

PENSION FUNDING DEMANDS: The funding levels of the commonwealth's pension systems have materially weakened as a result of annual contribution levels that have been well below actuarially determined annual required contribution (ARC) levels. Under current law, contributions are projected to reach the ARC for the two primary pension systems by as soon as fiscal 2017, but the budgetary burden will continue to increase, crowding out other funding priorities.

INCREASING BUT STILL MODERATE LONG-TERM LIABILITIES: The commonwealth's debt ratios are in line with the median for U.S. states. However, the commonwealth's combined debt plus Fitch-adjusted pension liabilities is above-average, and will likely continue growing given the current statutory schedule of pension underfunding for at least the next few years. Fitch views Pennsylvania's long-term liability burden as manageable at the 'AA-' rating so long as the commonwealth adheres to its funding schedule, or enacts reforms that do not materially increase liability or annual funding pressure.

SOLID ECONOMIC PROFILE: Employment growth continues for the state's broad-based economy, but at a slower pace than the nation. Below-average demographics represent a long-term drag on economic growth, though potential development of the significant natural gas reserves could mitigate that concern. Overall, the state's economy provides a solid base for future potential revenue growth to help manage ongoing expenditure pressures.

RATING SENSITIVITIES

GO-LINKAGE FOR APPROPRIATION BONDS: The rating on the bonds is sensitive to changes in the commonwealth's GO rating, to which it is linked.

CREDIT PROFILE

The 'A+' rating on the CFA revenue bonds reflects the credit of the commonwealth (GOs rated 'AA-' with a Stable 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 multiple service agreements, 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. The CFA and DCED have regularly met their covenants to request full appropriation of debt service from the general fund in annual budget requests. Partially as a budget management tool in fiscal 2015 (and also in fiscal 2011), Pennsylvania's enacted budget relies on the CFA's use of available interest earnings, in addition to state appropriations. Interest earnings are pledged to bondholders.

CFA was granted bonding authority for up to $1.135 billion in debt, of which $500 million is for alternative energy projects and the remainder for other programs including economic development initiatives (the original programs authorization). The series 2014A bonds are being issued under the alternative energy authorization, and the 2014B bonds are being issued under the original programs authorization. Following these issuances, Fitch estimates CFA will have issued $461 million of the $500 million in authorized alternative energy programs debt.

Pennsylvania faces fiscal pressures in the form of a structurally unbalanced budget, depleted reserves, and a rapidly growing pension cost burden following years of underfunding and market-driven investment declines. The 'AA-' rating 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.

Through the first quarter of fiscal 2015 (September), general fund revenues were tracking in line with the budgeted estimate. These results are very early in the fiscal year, but do indicate that there are no immediate additional budgetary pressures. Fitch notes the enacted budget included $2 billion in one-time, non-recurring items to achieve balance creating a substantial budget challenge for fiscal 2016. The state legislature's independent fiscal office (IFO) projects a significant structural budget gap of $1.7 billion for fiscal 2016, escalating steadily in the years thereafter. Fitch anticipates Pennsylvania will take necessary budgetary actions to move towards structural balance over the next several years. The newly-elected Governor takes office in January 2015 and will present his executive budget shortly thereafter.

For more information on the commonwealth of Pennsylvania's general credit quality, see 'Fitch Downgrades Commonwealth of Pennsylvania's GOs to 'AA-'; Outlook Stable' dated Sept. 23, 2014 and available at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=931795

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