The Pennsylvania 2015-2016 Budget Impasse may be (technically) over, but it just claimed another victim. From The Bond Buyer:
Standard & Poor’s has discontinued its underlying rating for credit enhancement programs on rated Pennsylvania school districts.
S&P announced the policy change Tuesday afternoon as an additional step to its December withdrawal of ratings based on Pennsylvania’s state aid intercept program for school districts and community colleges due to a lengthy budget impasse from lawmakers. The state aid intercept program ratings had been A or A-plus depending on bond provisions and were placed on credit watch negative in September.
For readers not familiar with this program, some background: Pennsylvania’s state government every years provides billions of dollars to local school districts to supplement the districts’ local property tax collections. The Pennsylvania School Code provides an “intercept” program in which the state funding due to a school district is intercepted by the state to pay debt service on the district’s bonds in the event of a defaulted payment on the debt. Depending on the exact structure, this form of credit enhancement previously ensured an A rating or an A+ rating by Standard & Poor’s for almost all districts in PA.
The 2015-2016 Budget Impasse, however, resulted in severe delays in the receipt of state funds by school districts (the state could not legally release the funds until a budget was passed) – as well as called into question the effectiveness of the intercept program as a credit enhancement, as the program also relied on the state funding that was delayed.
S&P’s ratings change means many school districts will face higher interest rate costs the next time they wish to issue bonds. For some marginal districts that relied heavily on the intercept program to sell their bonds, the loss of the underlying rating could possibly shut them out from the markets.