Overview

Pennsylvania local government (LG) credit quality should hold in the near term, considering the portfolio's steady revenue sources and strengthened reserves resulting partly from pandemic-related federal stimulus funds. Although S&P Global Ratings notes ongoing uncertainty around federal policymaking, bolstered reserve positions for LGs are likely to help mitigate current and future economic difficulties. S&P Global Ratings recently lowered its projections for economic growth, and anticipates U.S. economic expansion to slow sharply in 2025 and remain below the long-term average. (See "Economic Outlook U.S. Q2 2025: Losing Steam Amid Shifting Policies," published March 25, 2025, on RatingsDirect, and "'Liberation Day' Tariff Announcements: First Take On What It Means For U.S. And Global Outlook," published April 3, 2025.)

The potential for a broader economic slowdown in the short term could soften operating performance across the commonwealth. Budget constraints resulting from rising operating and capital costs amid slowing economic growth could intensify as LGs wean off federal stimulus. LGs that depend heavily on economically sensitive revenue such as earned income tax (EIT) and that have limited expenditure flexibility are the most exposed to pressure. Federal funding is not a significant portion of revenue for Pennsylvania LGs, although any unknown effects of tariffs and re-emerging price pressures, coupled with reductions in grant funding, may pressure LGs, especially those with limited operational and revenue-raising flexibility.

S&P Global Ratings maintains ratings on 207 municipalities and 30 counties. Credit quality has largely held, though 6.8% of municipalities and counties experienced rating changes in calendar 2024. Since Jan. 1, 2024, we raised our ratings on four counties and five municipalities, including Philadelphia (A+/Stable general obligation rating), attributable to some combination of sustained or improved financial positions, improved fiscal management practices, and measures taken to manage long-term liabilities. During the same period, we lowered our ratings on three counties and two municipalities, largely predicated on deteriorating financial positions, especially in LGs with economic limitations and comparably weaker management profiles.

As of this publication, one rating outlook is not meaningful as the rating is on CreditWatch for lack of timely information--namely fiscal 2023 audited financial results. The total number of ratings has decreased in recent years, partly because a comparably high number of issuers (relative to municipalities in most other states) have been unable to produce timely audited financial statements; in such instances, we have withdrawn our ratings.

What We're Watching In 2025 And Beyond

• High mortgage rates continue to depress real estate activity, especially as they may coincide with infrequent property tax assessments, leading to slower property tax revenue growth for municipalities and counties.
• The wind-down of federal stimulus funds could create budgetary pressure for those local governments that used funds for ongoing costs.
• Tariffs and other policy shifts that slow economic growth or worsen inflation could have an outsized effect on government entities, particularly those that are struggling to maintain balanced operations. For more information on the long-term effects of proposed tariffs, see "Global Credit Conditions Special Update: Ongoing Reshuffling," published April 11, 2025, and "Credit Conditions North America Special Update: Tariff Turmoil," published April 17, 2025.

• The economic landscape is diverse, with wealthier and higher-rated issuers typically concentrated in the large metropolitan regions, and with smaller cities and rural areas--which tend to be lower-rated, reflecting smaller tax bases with demographic challenges and limited revenue growth prospects--interspersed throughout the rest of the state.
• Gross state product growth projections track slightly below those of the nation, at 6.75% over the next four years, while employment is also expected to lag in the coming years, both on par with historical trends.
• Education funding remains a key issue for the state to address considering that its funding formula was found unconstitutional. As budgetary adjustments are made, the taxing dynamic between school districts and respective municipalities could change as districts' funding evolves. School districts also rely, to varying degrees, on property taxes and usually levy a higher millage rate, resulting in municipalities' cautious approach to raising property taxes. Furthermore, most municipalities that levy the earned income tax are at the legal maximum, further limiting revenue flexibility.
• The governor's proposed fiscal 2026 budget outlines potential revenue generating avenues, including legalization and taxation of adult-use cannabis, expansion of skill games, and additional grant funding to support public safety initiatives. Additional revenue diversification, even if ancillary, could support budget stabilization for LGs and potentially provide funds for various initiatives.

• Many local governments expect at least balanced results in the near term as a result of steady revenue growth and conservative budgeting. Projected deficits, when present, are largely the result of capital needs and rising public safety costs, most often in conjunction with limited tax levy capacity to raise revenue.
• Infrequent real estate assessments are a factor in tax-raising limitations. There is no formal, statewide property tax assessment process, leaving counties to reassess their property as they see fit. Some counties having gone more than 60 years since a reassessment, and this contributes to lower market and assessed values that in turn can limit tax-raising abilities. Intent to reassess has seen an uptick in several counties, improving prospective millage capacity for constituent municipalities.
• Most local governments administer single-employer uniform and non-uniform pension plans. Funded status varies by municipality but most plans are adequately to well-funded, so pension costs are not a stress for most local governments. However, poorly funded pensions are a pressure for some local governments--specifically Philadelphia, Pittsburgh, and Allegheny County--and we believe that weaker demographic trends could exacerbate this.

Pennsylvania Local Government Data

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