Pennsylvania had its general- obligation debt rating cut a step to Aa2 by Moody’s Investors Service, which said rising pension liabilities will weigh on the state’s economic recovery.
The grade, Moody’s third-highest rating, also reflects moderate economic growth and the state’s relatively high debt level, according to a statement today from the New York-based company. Moody’s also changed its outlook for the credit to stable from negative.
“Large and growing pension liabilities and moderate economic growth will challenge the return to structural balance, contributing to a protracted financial recovery,” Moody’s said in the statement. The state’s financial position deteriorated in fiscal 2012, according to the company, which said Pennsylvania probably will borrow to cover its cash-flow needs in 2013.
Republicans who lead the Legislature in Pennsylvania, considered a swing state in this year’s presidential election, passed a $27.7 billion budget for 2013, which began July 1. The spending plan signed by Governor Tom Corbett, also a Republican, cut business taxes and eliminated a general-assistance program for the poor and disabled.
Eric Shirk, a Corbett spokesman, didn’t immediately respond to a telephone call seeking comment on the downgrade.
Investors demand higher yields to hold state bonds. Ten- year Pennsylvania general-obligation debt had a yield of 0.56 percentage point more than top-rated municipal securities of similar maturity on July 13, the most since Oct. 6.
“It’s a bit of a wake-up call that pensions really count,” said Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC in Philadelphia. While Pennsylvania joined other recession-racked states in failing to make full pension contributions, “you have to pay the piper at some point,” Schankel said by telephone.
Neither of the Keystone State’s two retirement systems have enough assets to meet projected liabilities, according to recent financial reports.
The Pennsylvania State Employees’ Retirement System had 65 percent of what it needed as of December 2011, down from 75 percent a year earlier, according to a financial statement released May 31. The Pennsylvania Public School Employees’ Retirement System reported Jan. 31 that it had 69 percent of the assets it needed as of June 30, 2011.