Another bond-rating hammer fell on Pennsylvania Tuesday as Fitch Ratings downgraded the state's general obligation bonds to AA-minus from AA.
In dropping the Keystone State to its fourth-highest rating, Fitch cited structural imbalance and recurring problems, including unfunded pension liabilities.
"The downgrade to AA-minus reflects the commonwealth's continued inability to address its fiscal challenges with structural and recurring measures," Fitch said Tuesday.
"Pennsylvania is one of the states where we expected and still expect future negative rating activity to occur," said Janney Capital Markets director Tom Kozlik, who authored a report last week that red-flagged Pennsylvania, Illinois and New Jersey as states with structural problems not easily repairable.
Kozlik said Pennsylvania's economic profile and indicators have lagged U.S. indicators, despite natural gas drilling activity in the Marcellus Shale region.
"The state's structurally imbalanced budget suffers from revenue shortfalls and growing fixed costs, including pension funding pressures that are going to worsen over time because of underfunding."
Fitch, which also downgraded bonds supported by the commonwealth's annual appropriation pledge and bonds otherwise capped at the state's GO rating, adjusted its outlook to stable from negative.
David Fiorenza, a Villanova School of Business professor and former chief financial officer of Radnor Township, Pa., said Fitch made the right decision.
"Even though the outlook is stable for Pennsylvania, the administration has been ineffective at addressing the fiscal challenges as they relate to the pension issues hovering above the capitol," he said.
Fitch said a decade's worth of funding below the actuarially required contribution has "materially weakened" the levels of Pennsylvania's two main public employee pension funds, the State Employees Retirement System and the Public School Employees Retirement System. Pennsylvania last fully funded its ARC in 2004.
"Fitch's downgrade of Pennsylvania's general obligation bonds serves as a timely reminder that making the actuarially recommended contributions must be a high priority of any comprehensive pension reform proposal," said Richard Dreyfuss, a Hummelstown, Pa., actuary and an adjunct fellow at the Manhattan Institute for Policy Research.
Under current law, said Fitch, contributions are projected to reach the ARC for the two primary pension systems by as early as fiscal 2017, but the budgetary burden will increase, crowding out other funding priorities.
Fitch in 2013 downgraded the state to AA from AA-plus, citing inactivity on pensions. In late July, Moody's Investors Service lowered Pennsylvania to Aa3 from Aa2. Standard & Poor's said in April that it may lower Pennsylvania from AA if pension overhaul remains stalled.
According to Fitch, the most recent reported funded ratio for SERS, as of last Dec. 31, is 59.2%, dropping to 56.1% using Fitch's more conservative 7% discount rate assumption. Both ratios, said Fitch, are actually up slightly from the 2012 valuations of 58.8% and 55.7%, respectively. For PSERS, said Fitch, the reported funded ratio as of June 30, 2012, is 66.3%, or a Fitch-adjusted 62.9%.
Gov. Tom Corbett has asked lawmakers to support a bill to merge defined-benefit and defined-contribution plans for state and school employees under a so-called hybrid plan. It remains stalled in the legislature, however.
The unfunded liability of Pennsylvania's two major pension plans is around $50 billion. Including other post-employment benefit, or OPEB obligations, and municipal and county packages, the tab is around $73 billion.
"Gov. Corbett has made every attempt to address this issue, along with the privatization of alcohol, but he is continually met with resistance from a few in his own party," said Fiorenza.
Corbett press secretary Jay Pagni said in an interview that the governor and budget Secretary Charles Zogby will continue to press for pension change. "One of our major issues continues to be the pension issue," said Pagni. "We understand we have some ongoing budgetary risk. It was nice to see that [Fitch] cited our active budgetary management to address the shortfalls and our willingness to manage them accordingly."
Zogby has repeatedly warned about continued bond-rating downgrades should Pennsylvania do nothing about pensions.
Fitch said Pennsylvania could benefit from continued development of Marcellus Shale natural gas deposits, and eventual development of the Utica shale.
"While natural gas activity is subject to market-driven volatility, the abundance of supplies still presents a significant economic opportunity for the state," Fitch said.
The state's economy provided a backdrop to Monday night's gubernatorial debate in Hershey between Republican Corbett and his Democratic challenger, York businessman and former state revenue director Tom Wolf.
"We can't walk away from pensions," said Corbett.
Wolf stopped short of saying Pennsylvania was in crisis mode, but added: "We have a problem. If we do nothing, it will become a crisis."
Related downgrades by Fitch include $904.9 million in Pennsylvania Turnpike Commission motor license fund-enhanced turnpike subordinate special revenue bonds to AA-minus from AA; and $676 million in Pennsylvania State Public School Building Authority federally taxable revenue bonds. Also downgraded was the state's school credit enhancement intercept program, to A-plus from AA-minus.