Federal investigators' interest in a July 1993 certificates of participation sale by Pennsylvania has sparked concern among officials at Moody's Investors Service, who will discuss the matter with state officials next week.
Both Moody's and Standard & Poor's Corp. had previously scheduled meetings with state finance officials as part of a routine examination connected to the departure of the state's two-term governor, Bob Casey.
A spokeswoman for the governor's office, Sue Grimm, would not comment on the upcoming meetings. But executives at Moody's say they plan to question state officials about recent reports in The Bond Buyer of federal interest in the July 1993 sale.
The $762 million COP sale refunded lease revenue bonds sold in 1991 by five counties in the state. Republican opponents of Casey have criticized the deal as too expensive and possibly illegal.
Last week, The Bond Buyer reported that both the Internal Revenue Service and the Securities and Exchange Commission are examining the. 1993 issue.
Moody's officials say the examinations raise serious questions over the future of the securities' tax-exempt status. If the securities lost their tax exemption, it would place pressure on the state's general obligation credit rating.
Moody's rates the state's COs A1. Standard & Poor's rates the bonds AA-minus. The COP issue was insured by AMBAC Indemnity Corp. and received a AAA rating based on AMBAC's guarantee to pay interest and principal on the securities.
"We're concerned because there's an issue out there vis-a-vis investors," said Moody's analyst Robert Kurtter. "We're concerned from the investors' perspective because the IRS or the SEC might impact the tax exemption of the bonds."
Officials at Standard & Poor's, which is also scheduled to meet with state officials in coming weeks, say they too will discuss the federal probes with state officials.
Steve Nelli, a director at Standard & Poor's, said the rating company will focus during the meeting on a general review of the state's credit.
Nelli said that at least for the moment the company doesn't view the federal COP inquiries as a matter for concern. He said, for example, that the COPs are insured by AMBAC, which provides a degree of comfort even in a worst-case scenario.
AMBAC officials were not available for comment.
Aside from the concerns stemming from the COPs issue, both rating agencies and investors view the economy of Pennsylvania as stable and on an upward trend.
Neither gubernatorial candidate, Lieut. Coy. Mark Singel, a Democrat, or U.S. Rep. Tom Ridge, a Republican, has made taxes or other budget issues a centerpiece of his campaign.
Credit analysts are often often skeptical about political promises to reduce taxes. Raters often threaten downgrades unless state officials can match tax cuts with budget reductions.
For its part, Pennsylvania implemented a large tax increase in 1991 to offset declining revenues due to the recession. Since then, modest but steady growth permitted the state to end fiscal 1994 with a more than $1 billion budget surplus. Rating agency analysts predict a similar surplus at the end of fiscal 1995.
