Pennsylvania faces significant fiscal challenges that threaten to further weaken its credit quality if not addressed, including a large unfunded pension liability and structural budget imbalance. Its economic growth and tax revenues have lagged other states, and proposed solutions like a shale gas tax would not cure its problems. Pennsylvania's credit ratings were downgraded in 2014 due to these structural issues, and its credit quality is expected to continue deteriorating without policy changes that address its pension costs and spending levels.

1. Municipal Bond Market Note
janney fixed income strategy
January 7, 2015
JANNEY MONTGOMERY SCOTT
www.janney.com
© 2015 Janney Montgomery Scott LLC
Member: NYSE, FINRA, SIPC
Municipal Market • Page 1
Tom Kozlik
Municipal Credit Analyst
215.665.4422
tkozlik@janney.com
See page 3 for important
information regarding
certifications, our ratings
system as well as other
disclaimers.
U.S. State Fiscal Health Update - January 2015
Further Credit Deterioration Likely for Pennsylvania Without Policy Shifts
The good news for Pennsylvania (Aa3/AA-/AA-) is it is a sovereign entity with the ability to raise
revenue and/or cut spending. Such flexibility will be important as the Commonwealth seeks to cure
a structural imbalance. Governor-elect Tom Wolf (D) defeated incumbent Gov. Tom Corbett (R) in
November by pounding away at school district funding levels and the state’s economic performance
under Corbett’s watch, two issues also important for those holding PA or PA related debt. Wolf’s
campaign slogan boasted, “A Fresh Start for Pennsylvania.” Voters bought into the idea, but we are
not so sure if this “fresh start” will improve the Commonwealth’s credit quality.
The bad news is that the Commonwealth has a steep hill to climb to revive its ratings. Pennsylvania’s
tax base is not expanding at a fast enough pace to maintain current spending levels. Benefits from
Marcellus Shale hydraulic fracturing have not been the boon they were projected to be by some. In
fact, activity started to fall off back in 2012, even before oil prices dropped in 2014. A potential
shale gas severance tax is not a significant part of a solution either. The state’s economic growth,
labor market indicators and tax revenues have mostly trailed those of states leading the national
recovery. But even a return to a more “normal” level of growth would not cure the Keystone state’s
ills. Pennsylvania’s problems are structural, not cyclical. State lawmakers have been grappling with
a structurally imbalanced budget, a condition expected to continue. This structural imbalance will
require difficult policy choices- presenting challenges for a new Governor looking for a fresh start.
A significant unfunded pension liability of $76 billion (129% of revenues), more than double the
Moody’s state median, is a key source of the structural imbalance. We are becoming increasingly
skeptical that meaningful reform can be enacted. PA’s rainy day fund has been exhausted, so no
cushion remains to soften the blow of the next downturn. Pennsylvania credit quality is sure to
weaken if left on its current course and then more downgrades will follow.
Pennsylvania’s problems are
structural, not cyclical.
The Commonwealth’s credit
quality is sure to weaken if
left on its current course and
then more downgrades will
follow.
General Fund Revenues & Expenditures as a % of Pennsylvania GDP
Source: Pennsylvania Independent Fiscal Office and Janney FIS.
4.00%
4.20%
4.40%
4.60%
4.80%
5.00%
5.20%
94 96 98 00 02 04 06 08 10 12 14 16 18 20
GF Revenues as a % State GDP (left)
GF Expenditures as a % of State GDP (left)
Spending at current
levels is unsustainable.
Pennsylvania’s Underlying Rating Was Downgraded by All Three Agencies in 2014
Source: Moody’s, S&P, & Janney FIS.
Agency Rating Action ( Current Outlook) Reasons Cited Date
S&P Downgraded to AA- from AA (Stable) Fixed cost pressures (pensions), lack of reserves 9/25/2014
Fitch Downgraded to AA- from AA (Negative) Structural budget imbalance, pensions, lack of reserves 9/23/2014
Moody's Downgraded to Aa3 from Aa2 (Stable) Structural budget imbalance & pensions 7/21/2014

2. Municipal Bond Market Note
January 7, 2015
Municipal Market • Page 2
Janney U.S. State Fiscal Health Indicators
Source: Spreads are to 10Y AAA MMD benchmark per Thomson Reuters. Pension liability as a share of state govt. revenues is per Moody’s
Nov 2, 2014. State tax revenue % change 3Q14 to 3Q13 per Rockefeller Inst. Coincident Indices % change from Jan 2010 to Dec 2014
per Philly Fed. Mortgage foreclosure & 90 days past due data (non-SA) from the Mortgage Bankers Association 3Q 2014. Unemployment
rate (SA) per the Bureau of Labor Statistics as of Nov 2014 and Janney FIS.
State
Bond Ratings
(*a lease or ICR)
Spread to
10Y MMD
Oct 1, 14
Spread to
10Y MMD
Jan 5, 15
Pension Liability
(as a % State
Govt Revenues)
State Tax
Revenue (%
Change)
Coincident
Indices (% Chg
Jan 10-Dec 14)
"Seriously
Delinquent"
Morts. 3Q14
Unemploy.
Rate Nov
2014
Total/Average 16 17 60.3% 4.0% 13.9% 4.7% 5.8%
Alabama Aa1AA/AA+ 8 6 40.8% 4.7% 10.3% 4.6% 6.0%
Alaska Aaa/AAA/AAA 1 5 99.3% -74.3% -1.3% 1.8% 6.6%
Arizona* Aa3/AA-/NR 30 30 37.2% 3.4% 10.0% 2.3% 6.8%
Arkansas Aa1/AA/NR 8 7 47.4% 140.0% 8.3% 4.3% 5.8%
California Aa3/A+/A 25 24 92.5% 8.7% 17.4% 2.6% 7.2%
Colorado* Aa1/AA/NR 19 19 92.6% 9.2% 17.3% 2.0% 4.1%
Connecticut Aa3/AA/AA 28 29 236.0% 1.5% 14.7% 6.3% 6.5%
Delaware Aaa/AAA/AAA 0 0 76.6% -0.5% 13.4% 5.7% 6.0%
Florida Aa1/AAA/AAA 12 12 27.3% 5.7% 12.4% 9.0% 5.8%
Georgia Aaa/AAA/AAA 0 0 60.4% 4.6% 14.9% 4.3% 7.2%
Hawaii Aa2/AA/AA 17 19 125.8% 2.9% 9.2% 5.0% 4.0%
Idaho* Aa1/AA+/AA 20 20 28.5% 4.7% 13.8% 2.5% 3.9%
Illinois A3/A-/A- 150 140 268.3% 2.1% 14.0% 6.0% 6.4%
Indiana* Aaa/AAA/AA+ 12 12 63.6% 1.5% 20.4% 5.1% 5.7%
Iowa* Aaa/AAA/AAA 12 12 25.1% 5.5% 12.0% 3.0% 4.3%
Kansas* Aa2/AA/NR 15 17 140.7% -2.5% 10.1% 3.4% 4.3%
Kentucky* Aa2/AA-/A+ 20 21 193.2% 0.8% 13.9% 4.6% 6.0%
Louisiana Aa2/AA/AA 16 19 161.7% 4.2% 8.0% 4.8% 6.5%
Maine Aa2/AA/AA 5 8 111.6% 10.1% 12.8% 6.8% 5.7%
Maryland Aaa/AAA/AAA 0 0 142.0% 3.4% 8.3% 6.5% 5.6%
Massachusetts Aa1/AA+/AA+ 11 15 155.5% 2.7% 19.2% 5.3% 5.8%
Michigan Aa2/AA-/AA 26 29 58.6% 7.0% 28.7% 3.4% 6.7%
Minnesota Aa1/AA+/AA+ 4 6 27.6% 4.3% 15.2% 2.3% 3.7%
Mississippi Aa2/AA/AA+ 18 19 75.0% 6.3% 7.7% 5.7% 7.3%
Missouri Aaa/AAA/AAA 3 3 39.1% 3.5% 10.4% 3.4% 5.6%
Montana Aa1/AA/AA+ 20 19 75.5% 7.2% 10.9% 1.8% 4.3%
Nebraska* Aa2/AAA/NR 20 19 12.6% 5.9% 11.3% 2.4% 3.1%
Nevada Aa2/AA/AA+ 20 23 52.6% 5.9% 5.6% 6.3% 6.9%
New Hampshire Aa1/AA/AA+ 10 12 40.2% -3.3% 13.0% 3.3% 4.1%
New Jersey A1/A/A 45 56 179.7% 7.2% 10.2% 11.2% 6.4%
New Mexico Aaa/AA+/NR 12 13 46.3% ND 2.4% 4.8% 6.4%
New York Aa1/AA+/AA+ 7 7 24.2% 2.6% 13.9% 8.6% 5.9%
North Carolina Aaa/AAA/AAA 0 0 34.9% -6.5% 15.8% 3.7% 5.8%
North Dakota* Aa1/AAA/NR 18 19 50.8% -46.7% 45.5% 1.2% 2.7%
Ohio Aa1/AA+/AA+ 11 19 33.0% 2.9% 22.4% 5.4% 5.0%
Oklahoma Aa2/AA+/AA+ 19 19 82.4% 9.7% 13.9% 4.4% 4.4%
Oregon Aa1/AA+/AA+ 9 10 54.4% 9.1% 20.1% 4.2% 7.0%
Pennsylvania Aa3/AA-/AA- 30 31 129.7% 5.2% 14.8% 5.5% 5.1%
Rhode Island Aa2/AA/AA 32 31 114.3% 3.4% 16.4% 6.1% 7.1%
South Carolina Aaa/AA+/AAA 3 3 74.1% 5.0% 17.9% 4.5% 6.7%
South Dakota* Aa2/AA+/AA 22 22 29.5% 1.5% 10.2% 1.8% 3.3%
Tennessee Aaa/AA+/AAA 3 3 20.9% 4.7% 15.8% 4.1% 6.8%
Texas Aaa/AAA/AAA 8 9 102.8% 7.0% 21.8% 3.1% 4.9%
Utah Aaa/AAA/AAA 0 0 36.6% 8.4% 17.6% 2.7% 3.6%
Vermont Aaa/AA+/AAA 6 2 68.8% 3.3% 10.0% 4.5% 4.3%
Virginia Aaa/AAA/AAA 0 0 60.2% 7.1% 6.3% 2.7% 5.0%
Washington Aa1/AA+/AA+ 16 19 43.5% 5.1% 14.0% 3.8% 6.2%
West Virginia Aa1/AA/AA+ 16 19 117.0% 0.1% 10.0% 3.3% 6.3%
Wisconsin Aa2/AA/AA 19 20 13.8% -2.3% 13.9% 3.6% 5.2%
Wyoming* NR/AAA/NR 10 10 51.9% ND 6.6% 1.6% 4.5%

3. Municipal Bond Market Note
January 7, 2015
JANNEY MONTGOMERY SCOTT
www.janney.com
© 2015 Janney Montgomery Scott LLC
Member: NYSE, FINRA, SIPC
Municipal MArket • Page 3
Analyst Certification
I,Tom Kozlik, the Primarily Responsible Analyst for this report, hereby certify that all of the views expressed in this report accurately
reflect my personal views about any and all of the subject sectors, industries, securities, and issuers. No part of my compensation
was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
Definition of Outlooks- Positive: Janney FIS believes there are apparent factors which point towards improving issuer or
sector credit quality which may result in potential credit ratings upgrades. Stable: Janney FIS believes there are factors which point
towards stable issuer or sector credit quality which are unlikely to result in either potential credit ratings upgrades or downgrades.
Cautious: Janney FIS believes there are factors which introduce the potential for declines in issuer or sector credit quality that may
result in potential credit ratings downgrades. Negative: Janney FIS believes there are factors which point towards weakening in
issuer credit quality that will likely result in credit ratings downgrades.
Definition of Ratings- Overweight: Janney FIS expects the target asset class or sector to outperform the comparable
benchmark (below) in its asset class in terms of total return. Marketweight: Janney FIS expects the target asset class or sector to
perform in line with the comparable benchmark (below) in its asset class in terms of total return Underweight: Janney FIS expects
the target asset class or sector to underperform the comparable benchmark (below) in its asset class in terms of total return
Benchmarks- Asset Classes: Janney FIS ratings for domestic fixed income asset classes including Treasuries, Agencies,
Mortgages, Investment Grade Credit, High Yield Credit, and Municipals employ the “Barclay’s U.S.Aggregate Bond Market Index”
as a benchmark. Treasuries: Janney FIS ratings employ the “Barclay’s U.S. Treasury Index” as a benchmark. Agencies: Janney FIS
ratings employ the “Barclay’s U.S. Agency Index” as a benchmark. Mortgages: Janney FIS ratings employ the “Barclay’s U.S. MBS
Index” as a benchmark. Investment Grade Credit: Janney FIS ratings employ the “Barclay’s U.S. Credit Index” as a benchmark.
High Yield Credit: Janney FIS ratings for employ “Barclay’s U.S. Corporate High Yield Index” as a benchmark. Municipals: Janney
FIS ratings employ the “Barclay’s Municipal Bond Index” as a benchmark.
Disclaimer- Janney or its affiliates may from time to time have a proprietary position in the various debt obligations of the
issuers mentioned in this publication. Unless otherwise noted, market data is from Bloomberg, Barclays, and Janney Fixed Income
Strategy & Research (Janney FIS). This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not
be reproduced, distributed, or published by any person for any purpose without Janney’s express prior written consent.This report
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and may not represent the specific features or securities available at a given time. Preliminary Official Statements, Final Official
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investments may vary because of changes in interest rates, foreign exchange rates, securities prices, market indexes, as well as
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Estimates of future performance are based on assumptions that may not be realized. We have no obligation to tell you when
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