Pennsylvania Recieves Third Consecutive Credit Downgrade, and Its Pension System Is The Culprit

Just a few weeks ago, Pension360 covered the story of Pennsylvania’s pension tussle; in short, the state’s governor wanted lawmakers to address pension reform before they left on their vacations. Well, lawmakers are now on vacation and pension reform is gathering dust. The state’s credit rating is now paying the price.

From Reuters:

Moody’s Investors Service downgraded its rating on Pennsylvania debt to Aa3 from Aa2 on Monday, the third consecutive year that a new state budget has prompted a credit cut.
Moody’s cited underperforming revenues and the continued use of one-time measures in its latest downgrade. After wrestling with lawmakers over public pensions and cutting millions of dollars through line-item vetoes, Pennsylvania Governor Tom Corbett didn’t sign the 2015 budget until more than a week after the start of the new fiscal year on July 1.
The state has about $50 billion of unfunded long-term pension liabilities. About 63 cents of every new dollar of state revenue goes to pay pension costs, Corbett, a Republican, has said.
In order to close a deficit of about $1.5 billion without raising taxes, the state’s Republican-run legislature passed a spending plan that included one-time transfers of money from dedicated funds, such as one that helps volunteer fire companies purchase equipment.
Growing pension liabilities, coupled with modest economic growth, will limit Pennsylvania’s ability to regain structural balance in the near term, Moody’s said.

But the state can’t say it wasn’t warned; in fact, Moody’s, Fitch and S&P all warned Pennsylvania that they would be forced to downgrade its credit rating if the state produced an inadequate budget. A big part of what defined “adequacy”, in the eyes of the agencies, was doing something about the state’s dangerously unhealthy pension system.

Moody’s noted two key trends in its warning, released back in late April:

* High combined debt position driven by growing unfunded pension liabilities, and a history of significantly underfunding pension contributions that will be reversed slowly over the next four years
* 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

Moody’s, in its latest report, left the door open for upgrading the state’s rating. On the other hand, it also left the door open to downgrade it further. From Watchdog.org:

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.”

Pennsylvania now has the third-worst credit rating among all 50 states. Illinois and New Jersey are the only states that carry lower ratings.