Moody’s Investors Service, one day after lowering Pennsylvania’s general obligation bond rating to Aa2 from Aa1, took further action affecting the Keystone State on Tuesday.

Moody’s placed the state’s higher education system on review for downgrade, affecting $942 million of total rated debt, excluding that of privatized student housing. It also downgraded the enhanced ratings of Pennsylvania school districts benefiting from three state aid intercept programs.

The rating agency, in lowering the GO rating, said “large and growing pension liabilities” will challenge the return to fiscal balance for a state already in a weakened financial position. The move affects $364 million of debt.

Fitch Ratings assigns a AA-plus to the bonds. Standard & Poor’s rates them AA.

Clearly, the failure to fully fund its pension system is costing Pennsylvania on Wall Street.

“I don’t think the market will reverberate, although Pennsylvania will pay a few more basis points,” said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

Schankel expects to see more money for pension and health care benefits in future budgets. “I think they’re going to have to increase their contribution to pensions, which will probably come at the expense of something else,” he added. “Pennsylvania doesn’t want to be at the bottom of anybody’s list.”

Moody’s cited Pennsylvania’s use of budget reserves to balance its $27.7 billion budget, which Gov. Tom Corbett signed on June 30. The rating agency expects Pennsylvania to resume cash-flow borrowing in fiscal 2013.

According to the Pew Center on the States, Pennsylvania failed to consistently pay its full annual pension contribution from 2005 to 2010. The system was 75% funded in fiscal 2010 and faced a $29 billion funding gap. Pew considers 80% an acceptable threshold.

In 2010, Pennsylvania paid nearly 29% of the recommended contribution to its pension plans and merely 59% of what the state should have paid to fund retiree health benefits, Pew said in a June report.

“You’ve got some very powerful forces out there,” said John Filan, a vice president at restructuring firm Development Specialists Inc. who cited the maturing of baby boomers just as pension asset returns are suppressed. He said other states could be in line for downgrades.

“This whole pension issue is complicated legally. You may be right legally, but are you really winning your battles?” Filan added.

Moody’s actions come while several cities within Pennsylvania are struggling, some severely. Twenty-seven municipalities are categorized as distressed, according to the state’s Department of Community and Economic Development, which oversees the Act 47 workout program for such communities.

Notably, capital city Harrisburg is under receivership, a federal judge last fall having invalidated a bankruptcy filing by its City Council. Receiver William Lynch could file a Chapter 9 petition on behalf of the city after Nov. 30.

Scranton, whose cash reserves dipped to as low as $5,000 recently, has been paying employees the federal $7.25 minimum wage in defiance of a Lackawanna County court order. The unions there are suing over the move. Additionally, Scranton must pay a $15 million arbitration settlement after the state Supreme Court ruled against the city last fall.

In Altoona, which joined Act 47 in May, deficits the past four years have ranged from 11% to 19% of revenue for all governmental funds, and could widen without intervention.

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