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October 16, 2015

Pennsylvania's credit outlook downgraded by Moody's

Pennsylvania now has a negative outlook on its $10.9 billion general obligation bonds

Moody's Investors Service downgraded the outlook on Pennsylvania's credit rating to negative Friday, citing a "contentious political environment" that will make closing its structural budget gap difficult.

The revised outlook, previously considered stable, affects the commonwealth's $10.9 billion general obligation bonds, which were affirmed at an Aa3 rating. That rating is three notches below Moody's top rating of Aaa.

Pennsylvania is more than 100 days into a budget impasse that has seen Democratic Gov. Tom Wolf and a Republican legislature take hardened stances. Republicans have opposed Wolf's proposed tax increases, which include higher income and sales taxes. Wolf has vetoed alternatives presented by the legislature.

"Meanwhile, ongoing expenditures exceed ongoing revenues by about $2 billion," Moody's wrote in its outlook explanation." The structural gap is higher accounting for commonwealth's pension shortfalls relative to its actuarial required contributions. Amid its extreme political gridlock, the commonwealth will be challenged to find solutions to its fiscal imbalance."

To remove the negative outlook, Moody's said Pennsylvania need to make successful steps to close its structural deficit, substantial progress toward achieving stronger pension funding levels, or achieve faster-than-expected economic growth.

Moody's also affirmed Pennsylvania's $2.4 billion appropriation bonds at A1 and A2 ratings.