Overview

Pennsylvania counties and municipalities are generally well positioned to manage economic headwinds that include inflationary pressures, rising interest rates, and an expected shallow recession in 2023. (For more information on S&P Global Ratings' economic forecast, see "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on RatingsDirect.) Local governments across the commonwealth are emerging from the COVID-19 pandemic, having benefited from modest revenue recovery and federal stimulus funding that have bolstered reserves. S&P Global Ratings expects that healthy reserves and proactive budgetary management will allow Pennsylvania local governments to weather a potential economic downturn and preserve credit quality across the portfolio.

S&P Global Ratings maintains ratings on 245 municipalities and 39 counties. Overall, the credit quality of municipalities and counties in the commonwealth remains stable, with 3.9% experiencing rating changes in calendar 2022. Over that span, three municipalities and three counties had upgrades on general obligation bonds, and five municipalities had downgrades. Currently, 94.4% of the ratings have a stable outlook, 3.9% have a negative outlook, and 1.7% have a positive outlook.

What We're Watching

Most governments in Pennsylvania are well positioned to face economic headwinds

Economic recovery from the pandemic has helped sustain property wealth and income levels across the commonwealth, and has stabilized local revenue for municipalities and counties. The commonwealth has a diverse economic landscape, with wealthier and higher-rated credits typically concentrated in the large metro regions, and with smaller cities and rural areas, which tend to be weaker economically and lower-rated, interspersed throughout the rest of commonwealth. A shallow recession in 2023 could disrupt this period of economic recovery, though we expect larger, more economically diverse areas of the commonwealth will remain fairly stable. In our view, local governments with more limited economies could experience more credit pressure.

Modest revenue growth and federal stimulus funding have helped Pennsylvania local governments remain fiscally stable, with about 70% of the rated universe reporting positive general fund operating results in the most recent audited year (which, for most, is fiscal 2021). That said, a spend-down of federal funding, coinciding with macroeconomic stress, could lead to some fiscal pressure in the next few years. Therefore, we expect management teams to make budget adjustments to maintain fiscal stability and healthy reserves.

Debt and pension liabilities remain manageable for most Pennsylvania counties and municipalities. In addition to American Rescue Plan Act funding, money from the Infrastructure Investment and Jobs Act and Inflation Reduction Act should help local governments address a portion of their capital and infrastructure needs. However, aging infrastructure across the commonwealth will still likely lead to higher debt loads over the longer term. Furthermore, rising interest rates will also likely consume a greater proportion of local governments' budgets.

Most local governments administer single-employer uniform and non-uniform pension plans. Funded status varies by municipality but most plans are fairly well funded, so pension costs are not a stress for most local governments, though we expect market losses in 2022 will likely weaken funded ratios. Poorly funded pensions are a pressure for some local governments, and we believe that weaker demographic trends could exacerbate this. A prime example is the City of Chester (unrated), which recently filed for bankruptcy, partly as a result of a severely underfunded pension system. For more information on Pennsylvania pensions, see "Pension Spotlight: Pennsylvania," published July 19, 2022.

Infrequent real estate assessments are a factor in tax-raising limitations

Pennsylvania does not have a formal, statewide property tax assessment process, leaving counties to reassess their property as they see fit. This has resulted in some counties going more than 30 years since their latest reassessment, which in turn is a contributing factor to lower market and assessed values, which can then limit tax-raising abilities.

Infrequent assessments are one of several factors that might limit a local government's revenue raising ability. For example, most local governments are also subject to state-imposed property tax rate maximums, although most counties and municipalities are well below the cap. And for many local governments, the local school district also relies on property taxes to fund education and usually levies a higher millage rate, resulting in municipalities cautiously approaching raising property taxes. Furthermore, most municipalities that levy the EIT are at the legal maximum, further limiting revenue flexibility. Therefore, management of property tax rates and control of expenditures will continue to be important factors in maintaining short- and long-term financial stability for counties and municipalities across the commonwealth.

Spotlight On Environment, Social, And Governance Credit Factors

We view Pennsylvania local governments' physical risks as neutral, but we believe some counties and municipalities face some increased exposure from inland flooding hazards. In our opinion, most local governments' exposure to social capital risks is also neutral, but in some cases it could be a negative credit factor for those with rapidly aging and declining populations. While most individual counties and municipalities' governance structure is neutral, prolonged budget impasses have sometimes adversely affected counties' revenue from the state, most recently in fiscal 2016. However, the change in the state's leadership, including a split legislature, may lead to a return of this risk. On the other hand, Pennsylvania has positive governance structure aspects, including the Municipalities Financial Recovery Act, which the Department of Community and Economic Development oversees, providing state fiscal oversight for counties and municipalities. Finally, the commonwealth allows for municipalities to declare bankruptcy, and while such an occurrence is uncommon, we will monitor any filings in Pennsylvania, including Chester, because of the potential impact on other issuers.

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