PA lawmakers get stern warnings from three major credit rating agencies

By Eric Boehm | PA Indepenent

Once is a fluke, twice can be a coincidence.

But three times is a trend.

Over the last two weeks, all three major credit rating agencies have issued stern warnings to Pennsylvania policymakers in advance of the coming budget season. Two of them, Fitch and Standard & Poor’s, say they may be forced to reduce Pennsylvania’s credit rating, making it more expensive for the state to borrow money on the bond market, unless pension debts are addressed and spending is brought in line with revenue to address a structural deficit in the state budget.

“Pennsylvania faces fiscal pressures in the form of a structurally unbalanced budget, depleted reserves, and a rapidly growing pension cost burden following years of underfunding and market-driven investment declines,” Fitch warned on April 24. “Continued inability to address these concerns, or worsening of any of these conditions, over the near term could trigger further negative rating action.”

The agencies are most worried about Pennsylvania’s $48 billion unfunded pension liability, which is split between the State Employees Retirement System and the Public School Employees Retirement System.

The state has not adequately funded either system in a decade, and the long-deferred costs are causing serious problems. The state spent $1.5 billion on pensions this year — less than half of what is required to keep the plans solvent — and that total is expected to jump to more than $2 billion in the 2014-15 budget.

“Rapidly growing pension contributions will absorb much of the commonwealth’s financial flexibility over the next four years challenging its ability to return to structural balance or make meaningful contributions to the depleted budget stabilization fund,” said Moody’s in an April 24 press release.

Pensions might be the biggest, but they are far from the only concern for the state’s credit rating.

Standard and Poor’s warned the state has overspent in recent years and needs to bring the budget into line with existing revenue.

“The budget is not structurally balanced and relies on one-time savings, deferrals and other measures that add uncertainty,” the agency said in an April 28 report calling for “a concerted effort to bring revenues and expenditures into alignment.”

That will be no easy task this June.

Corbett has proposed a $29.4 billion budget for the 2014-15 fiscal year, a 3.3 percent increase over the current year’s spending.

But the revenues are coming up well short of that target.

The state Department of Revenue reported on Thursday the state is nearly $500 million in the hole for the current fiscal year — a hole that must be filled before lawmakers can begin thinking about the millions in additional spending Corbett wants in next year’s budget.

Erik Arneson, spokesman for Senate Majority Leader Dominic Pileggi, R-Chester, said Pennsylvania has some serious budgetary issues to address in the next two months.

“The recent rating agency reports raise some of the most significant, including the need for serious pension reform and the need for a budget that is structurally balanced over the long term,” Arneson said Thursday.

News reports indicate the Corbett administration plans to scale back its budget plan for next year, perhaps by as much as $1.2 billion. The administration didn’t return requests for comment on the warnings from the ratings agencies.

One place the administration may look for budget savings is by continuing to short-change the pension plans. For two years, Corbett has been pitching a plan to defer pension payments over the short term in the hopes of achieving long-term savings by changing benefit structures for state workers and public school teachers.

But with ratings agencies concerned with Pennsylvania’s funding of its pension systems, adding to the debt could hurt the state, said state Rep. Joe Markosek, D-Allegheny, minority chairman of the House Appropriations Committee.

“Any changes to pensions need to be carefully considered, especially in light of recent warnings from the credit rating agencies,” he said.

Markosek’s fellow Democrats have generally opposed any changes to the pension systems and favor increasing revenue to meet the obligations.

In light of the lower-than-expected revenue this year, many Democrats have called for higher taxes on gas drilling companies and the closing of corporate tax loopholes.

“Bond rating agencies have already issued stern warnings that the governor’s proposed budget continues a series of irresponsible budget and financial policies that will result in further downgrades to our bond ratings and significantly raise the cost of future borrowing,” said state Sen. Vincent Hughes, D-Philadelphia, minority chairman of the Senate Appropriations Committee.

Michael Stoll, spokesman for House Appropriations Committee chairman Bill Adolph, R-Delaware, said the ratings agencies’ concerns were “constructive feedback” as budget discussions got underway in Harrisburg.

Stoll pointed to the state’s dropping unemployment rate — down to 6 percent in March from 7.7 percent a year earlier — as a sign that revenue growth would be coming.

The administration forecast 4 percent growth for the current fiscal year, which has so far failed to materialize.

While policymakers in Harrisburg wait for revenue to rise, Pennsylvania’s bond rating might drop.

Boehm can be reached at Eric@PAIndependent.com and follow @PAIndependent on Twitter for more.