Budget blues: Moody’s downgrades Pennsylvania’s bond rating

By Andrew Staub | PA Independent

That didn’t take long.

Just weeks after Pennsylvania lawmakers passed a patchwork budget and skipped town without addressing pension reform, Moody’s has downgraded Pennsylvania’s general obligation bond rating. It dropped the state fom Aa2 — its third-highest rating — to Aa3.

The move comes after the three major rating agencies issued warnings to the state in advance of the budget season.

Among the reasons Moody’s cited? The state’s “growing structural imbalance, exacerbated by the fiscal 2015 enacted budget that depends on non-recurring resources.”

While Democratic lawmakers had strong complaints about the budget’s reliance on one-time fixes, Republican Gov. Tom Corbett didn’t address that part of Moody’s rationale in a statement issued Monday afternoon. Instead, he focused on the rating agency’s assertion the state’s pension problem contributed to the downgrade.

Moody’s indicated that “large and growing pension liabilities coupled with modest economic growth will limit Pennsylvania’s ability to regain structural balance in the near term.”

The administration’s statement said Pennsylvania’s unfunded pension liabilities are expected to grow from the current $41 billion to $65 billion.

“It’s clear that this pension crisis has put severe strain on Pennsylvania’s finances,” said Corbett, who has been traveling the state to argue for pension reform. “As families struggle with skyrocketing property taxes, pension costs are consuming more than 60 cents of every new dollar of state general fund revenues. Doing nothing is not an option and doing nothing fails our families.”

The rating could improve, Moody’s said, if the state reduced its long-term liabilities, including its unfunded pension liability. The rating could also rise if Pennsylvania replenished its reserves and revenues came in above projections, Moody’s indicated.

In turn, the rating could drop more if revenues come in worse than expected, if long-term liabilities grow and if further declines pressure liquidity, Moody’s said.

Moody’s gave Pennsylvania a stable outlook, saying that while Pennsylvania’s economy will grow more slowly than the United States on average, it has stabilized. Moody’s also cited a “recent history of improved governance, reflected in timely budget adoption and proactive financial management.”

State Rep. William Adolph, R-Delaware, chair of the House Appropriations Committee, said a rating change was “always in the back of my mind.”

While he said the news was disappointing, Adolph didn’t think balancing the budget with one-time transfers was the wrong approach, considering the state lost some federal funding and a took a revenue hit because of federal tax law changes.

Without the strategy, Adolph said lawmakers might still be in Harrisburg working out a budget.

“Considering the stress that we were under, I don’t believe we had much of a choice,” he told Watchdog.org.

State Sen. Jake Corman, the Republican chairman of the Senate Appropriations Committee, didn’t immediately return a message seeking comment.

Staub can be reached at Andrew@PAIndependent.com. Follow @PAIndependent on Twitter for more.