Pennsylvania and Pittsburgh: A tale of two credit ratings

By Rachel Martin | Watchdog.org

PITTSBURGH — Pennsylvania’s credit rating has taken another hit, in contrast to August’s welcome news that Pittsburgh’s credit rating was upgraded. Surprisingly, a local economics professor said the picture between the two isn’t as different as one might think.

Robert Strauss, an economics and public policy professor at Carnegie Mellon University and longtime economic policy analyst, said he’s happy for the city, but “the fundamentals haven’t changed.”

On Tuesday, Fitch Ratings again downgraded Pennsylvania’s credit rating from AA to AA- “because of the state’s budget problems and escalating pension liabilities.” This follows Moody’s Investor Service’s July downgrade, from Aa2 to Aa3.

Read Watchdog’s recent rundown of Pennsylvania’s downward ratings trend here.

In contrast, Moody’s gave Pittsburgh a late summer gift of a credit-rating upgrade. It affirmed an A1 rating and revised the city’s outlook from stable to positive.

Strauss said some of the positive rating is because the agencies “think better of Pittsburgh than before.” Strauss said Pittsburgh Mayor Bill Peduto and his chief of staff are more actively managing the city and are more financially transparent than in the past.

It’s not so much the city has demonstrated “financial rectitude,” he said, but that “clouds have lifted off the city” — even through a grand jury didn’t indict former Mayor Luke Ravenstahl.

A lot of things need to happen for Pittsburgh’s financial health to be substantively better, he said, including reining in the salaries of public-sector union employees.

Tim McNulty, spokesman for Peduto, was reluctant to make comparisons between the ratings decisions for the city versus the state.

“It would be tough for me to comment on that,” he said. “Even ours is complicated.”

In Moody’s most recent state downgrade, the agency cited “the commonwealth’s growing structural imbalance, exacerbated by the fiscal 2015 enacted budget that depends on non-recurring resources.” One possible recurring revenue resource would be a fracking severance tax, prominent in the gubernatorial race.

“A Marcellus tax makes sense in the abstract,” Strauss said. “But the rates must be competitive,” so drillers don’t feel forced into neighboring states. He believes a tax in the 3-5 percent range is “tolerable.”

Strauss said state budgets are often tweaked to make the numbers look better, but those sort of “budgetary shenanigans” are “what everybody does,” he said.

Check out Watchdog’s coverage of states’ budget games here.

There are a variety of reasons for Pittsburgh’s structural deficit, but a prominent one is always pensions. Another is that “revenue estimates have not been realized,” said Strauss. This came clearly to the forefront last week, when Pennsylvania had to borrow from the treasury to meet basic obligations not even three months into the fiscal year.

A related but less mentioned issue is what Strauss calls a “huge tax giveaway” in how the state treats retirement income.

Strauss said Pennsylvania is one of only six states that doesn’t tax public retirement income — like Social Security and pension payments to public employees — and one of only three that doesn’t tax any sort of retirement income.